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THE  LIBRARY 

OF 

THE  UNIVERSITY 

OF  CALIFORNIA 

LOS  ANGELES 

SCHOOL  OF  LAW 

Gift  of 
Bencer-Moss  Co. 


A 
TREATISE 


ON  THE 


FEDERAL  CORPORATION  TAX  LAW 

INCLUDING  THEREIN 

A  Conunentary  on  the  Act  itself,  an  Appendix  containing  the  Text  of  the  Act 

all  Rules  and  Regulations  of  the  Treasury   Department,  relating  in  any 

way  to  the  Act ;   Text  of  all  Laws  relating  to  the  Collection,  Re- 

missicn  and  Refund  of  Internal  Revenue ;  Text  applicable 

to  the  Administration  of  the  Federal  Corporation  Tax 

Law,  and  Opinions  of  the  Attorney-General 

bearing   upon  the    Meaning   of  the  Act 


BY 

THOMAS  GOLD  FROST,  LL.D.,  Ph.D. 

OF  THE  NEW  YORK  CITY  BAR 

Author  of  General  Treatise  on  the  Law  of  Guaranty  Insurance,  The  Incorporation 

and  Organization  of  Corporations,  etc. 


ALBANY,   N.  Y. 

MATTHEW  BENDEE  &  COMPANY 

1911 


T 


Copyright.    1911 
By  MATTHEW  BENDER  &  COMPANY 


DEDICATED  TO 

HON.  PHILIP   S.    POST,  jR. 

OF  THE  CHICAGO  BAR 


PREFACE. 


The  purpose  of  the  author  in  presenting  a  Treatise  on  the 
Federal  Corporation  Tax  is  to  provide  both  the  profession  and  the 
public  generally  with  a  comprehensive  text  book  on  a  subject 
which  has  up  to  the  present  time  received  but  little  attention.  In 
the  present  volume  will  be  found  not  only  a  full  discussion  of  the 
text  of  the  law  itself,  but  there  has  been  added  as  well  a  synopsis 
of  all  the  rulings  of  the  Treasury  Department  on  the  subject, 
together  with  the  opinions  of  the  Attorney-General  and  the 
decisions  of  the  courts  bearing  thereon.  It  is  the  hope  of  the 
Author  that  in  writing  a  book  of  this  character  he  will  have 
furnished  not  only  to  the  legal  profession  but  to  federal  officials 
and  corporate  officers  generally  a  work  which  they  will  find  both 
helpful  and  useful. 

Thomas  G.  Fbost.      , 

New  York  City,  November  2,  1911. 


TABLE   OF  CONTENTS. 


CHAPTER  1. 

NATURE  OF  THE  FEDERAL  CORPORATION  TAX  ENACTMENT. 

Section       1.  History  of  the  Corporation  Tax  Law  of  1909 1 

2.  The  Tax  Is  Undoubtedly  an  Excise  Tax 2 

3.  The  Federal  Corporation  Tax  Is  Not  a  Franchise  Tax 3 

4.  The  Tax  Is  Not  a  Direct  Tax  Upon   Shares  or  the  Income 

Thereof    5 

5.  The  Tax  Is  Not  a  Direct  Tax   Even   In   the   Case  of  Com- 

panies Engaged  Mainly  or  Wholly  In  the  Business  of 
Handling  or  Dealing  In   Real  Estate 6 

6.  The  Federal  Corporation  Tax  Is  Not  In  the  Nature  of  An 

Infraction  Upon  the  General  Powers  of  the  States  to 
Authorize  the  Formation  of  Corporations  and  Joint 
Stock    Companies    7 

7.  The  Fact  That  the  Federal  Corporation  Tax  Operates  Upon 

Public   Service  Companies   Does  Not  AfTect  the  Validity 

of  the  Act 11 

8.  The  Federal   Corporation   Tax  Is   Not  Imposed  Upon  State 

or  Municipal  Bonds  or  Upon  the  Income  of  Such  Bonds 
Forming  Part  of  the  Business  Assets  of  the  Company 
Whose   Business   Is   Taxed 14 

9.  As  An  Excise  the  Tax  Is  Uniform  Under  Clause   1  of  Sec- 

tion 8  of  Article  1  of  the  L'nited  States  Constitution.  .     .      IG 

10.  The    Federal    Corporation   Tax   Does    Not    Lack    Uniformity 

Because  It  Contains  Certain  Exemption  As  to   tlie  Kind 

of  Corporations  Which  Are  Subject  to  the  Tax IS 

11.  The    Federal    Corporation    Tax    Does    Not   Subject   Corpora- 

tions to  Unreasonable  Search  or  Seizures,  or  Require 
Officers  Thereof  to  Incriminate  Themselves 20 

12.  The   Tax    May    Be    Collected    In    One    Year    Though    It    Is 

Measured  By  the  Net  Income  of  the  Tax  Paying  Com- 
pany During  the  Preceding  Year 21 


CHAPTER  II. 

CONSTITUTIONALITY   OF   THE   ACT. 

Section     13.  Constitutionality  of  th.-  Fodoral   Corporation  Tax. 

[vii] 


22 


M'i 


Table  of  Contents. 


CHAPTER  III. 

CONSTRUCTION  AND  INTERPRETATION  OF  THE  ACT. 

Section     14.  Construction  and  InterpreUtion  of  the  Act 48 

15.  Rules  for  the  Construction  and  Interpretation  of  the  Federal 
Corporation   Tax   Act 


43 


CH.^PTER  IV. 

SCOPE  AND  INTENT  OF  THE  ACT. 

Section     16.  General  Discussion  of  the  Act  With  Reference  to  Companies 

Affected    Thereby    51 

17.  Definition   of  a  Corporation 52 

18.  Definition  of  Joint  Stock  Companies 52 

19.  Definition    of    Association 54 

20.  Meaning  of  Organization  for  Profit 65 

21.  Meaning  of  the  Phrase  Having  a  Capital  Stock  Represented 

by    Shares     ^5 

22.  Definition  of  Insurance  Companies  as  Used  in  the  Act 66 

23.  Character  and  Purpose  of   Corporations,   Joint  Stock   Com- 

panies and  Associations  —  How  Determined 67 

24.  General    Statement    as   to    Classes   of    Companies    Excepted 

From  the  Operation  of  the  Act 68 

25.  Definition   of   Labor   Organizations 69 

26.  Definition  of   Agricultural   Organizations 69 

27.  Definition   of   Horticultural   Organizations 70 

28.  Definition  of   Fraternal  Beneficial   Societies 71 

29.  Legal   Effect  of  Excluding  From  the  Operation  of  the  Act 

Certain  Classes  of  Fraternal  Beneficial  Organizations 
and   Societies   71 

30.  What  la  In  Fact  the  Lodge  System 71 

31.  Meaning  of  the  Phrase  Providing  for  the  Payment  of  Life, 

Sick,  Accident  and  Other  Benefits  to  the  Members  of 
Such  Societies,  Orders  and  Associations  and  Dependants 
of  Such    Members 72 

32.  Definition  of  Building  and  Loan  Association 72 

33.  Meaning  of  tlie  Phrase,  Organized  and  Operated  Exclusively 

for  the  Mutual  Benefit  of  Their  Members 72 

34.  Definition  of  Religious  Corporations  and  Associations 73 

35.  Definition  of  ("haritiilije  Organizations  and  .Associations....  73 

36.  Definition  of    K<lw(iit  ional   Corjjorat  ions  and  Associations...  74 

37.  Meaning    of    the    I'hrnse    No    Part    of    the    Net    Income    of 

Whirli    Inures  to  the  Benefit  of  .Any   Private  Stockholder 

or    Individual    74 

38.  Are   C'or[)orations  Organized  or   Dissolved   Within   the  Year 

for  Whicli  the  Federal  Corporation  Tax  Is  Levied.  Sub- 
ject to  111.'  r.iyiiicnt  Thereof 75 

39     IVfinitiuii    of    Forc-i'_Mi    f'orpornt ions 76 


Table  of  Contk>"ts.  ix 

40.  What  Foreign  Corporations  Are  Subject  to  the  Payment  of 

the  Federal  Corporation  Tax  Law 77 

41.  Meaning   of    Phrase   Engaged    In    Business    In   the    United 

States     ^2 

42.  Rules   for  Determining   Whether   a   Foreign  Corporation  Is 

Engaged  In  Business  In  the  United  States 82 


CHAPTER  V. 

TAX  RETURNS. 

Section     43.  Tax  Returns  —  General  Provision  In  Relation  Thereto 84 

44.  Inventories     ^^ 

45.  Content  of  the  Return 89 

46.  The  Return  —  By  Whom  Made 91 

47.  The  Return  —  Where  to   Be  Made 91 

48.  Verification   of    Return 92 

49.  Tax  Returns  From  Insurance  Companies 93 

50.  Tax  Returns  From  Banks  and  Financial  Institutions 94 

51.  Tax  Returns   From  Transportation   Corporations 96 

52.  Tax   Returns   From  Manufacturing  Corporations 98 

53.  Tax  Returns  From  Mercantile  Corporations 99 

54.  Tax  Returns  From  Miscellaneous  Corporations 101 


CHAPTER  VI. 

FUNDAMENTAL  BASIS  OF  THE  FEDERAL  CORPORATION  ACT. 

Section     55.  What  Is  the  Fundamental  Basis  of  the  Federal  Corporation 

Tax     104 

56.  Definition    of    Income 105 

57.  Meaning  of  the  Phrase  "  Income  Received  "   In   Paragraph 

2  of  the  Act 105 

58.  Meaning  of  the  Phrase  "  Income   From  All   Sources  Found 

In  Paragraph  2  of  the  Act 107 

59.  Classification  of  the  Elements  Which  Go  to  Make  Up  the 

Gross  Income  of  Corporations  and  Companies  Subject  to 

the    Tax    108 

60.  Income    From    Business 109 

61.  Income   From   Investment 112 

62.  Income  From  Capital  Invested  In  Personal  Property 112 

63.  Income  From  Real   Estate 112 

64.  Income  From  Sale  of  Capital  Assets 113 

65.  Income  From  Property  Constitutionally  Exempt  From  Fed- 

eral  Taxation    1 1  -^ 

66.  Income  From  Dividends  on  Stock  Held  In  Other  Companies.  115 

67.  Income  Received  In  a  Representative  Capacity 117 

68.  Income  From  Foreign  Business  and  Foreign  Investments.  .  .  117 


Table  or  Co^" tents. 

69.  Meaning   of  Net   Income 117 

70.  Manner  of  Ascertaining  Net  Income  of  Domestic  Companies  117 

71.  Manner  of  Ascertaining  Net  Income  of  Foreign  Companies.  .    118 

72.  Are   the   Terms   Net   Income  and   Net  Profits    Identical   In 

Meaning     H^ 

73.  Are  the  Provisions  of  the  Act  as  to  the  :Method  of  Calculat- 

ing tlie  Net  Income  of  Companies  INIandatory  or  Directory   119 

74.  Statutory  List  of  Deductions  to  be  iSIade  From  Gross  Income  120 

75.  Deductions    of    Expense    of    Maintenance    of    Business    and 

Properties     1-- 

76.  Deductions     for    Expense     of    Operation    of     Business    and 

Properties    l-<^ 

77.  Meaning  of  Ordinary  Expenses 123 

78.  Meaning  of  Necessary  Expenses 1-3 

79.  Meaning  of  Expenses  Actually  Paid  Out  of  Income 124 

80.  What  Are   Proper  Charges   for   Rentals  or   Franchise   Pay- 

ments         124 

81.  Deduction    for   Losses 124 

82.  Meaning   of    Losses 125 

83.  Meaning  of  phrase  "  Losses  Actually  Sustained  Within  the 

Year "    125 

84.  Condition   That  Losses   Must   Not  Have  Been  Compensated 

by  Insurance  or  Otherwise 125 

85.  Meaning  of  Reasonable  Allowance  for  Depreciation  of  Prop- 

erty        126 

86.  Deductions   by    Insurance    Companies  —  What   Are    Permis- 

sible         127 

87.  Allowance  for  Sums  Paid  on  Policies  and  Annuity  Contracts  127 

88.  Allowance   for   the   Net   Addition    Retjuired   by   Law  to    Be 

Made  to  Reserve  Funds 127 

89.  Deductions    for    Indebtedness 127 

90.  Deduction    for    Interest   Actually    Paid  on   the    Bonded   In- 

debtedness         128 

91.  Deduction  for  Interest  Actually  Paid  on  Indebtedness  Other 

Than    Bonded     128 

92.  Limitation  I'pon  tlie  Allowance  for  Interest 12S 

93.  Deduction    In  Case  of   Banking   Institutions  to  the  Amount 

of  All   Interest  Actually  Paid  by  Them  Within  the  Year 

on    Deposits    130 

94.  D.'diictinn    for    Taxes 131 

95.  .Mi-:uiing  of  the  Word  "  Taxes  "  as  Employed  In  the  Act.  .  .  .  131 
9(1.   \\  but  Species  of  Foreign  Taxes  May  Be  Deducted 131 

97.  Dfdncfions    to    the    .\inniiiit     nf    Dividends    Received    Upon 

Stock  of  Other  CompaMics  Suhjcct  to  tlie  Payment  of  the 
Corporation    Excise   '! "ax 131 

98.  Are    Deductions    Permissible    for     nividcnds    on    Shares    In 

;i   Company   Wliosc   \et    Income   Is   Less  Than  .155,000 13-.2 

99.  An-    Deduct  ioiis     I'ciini'isihlc    on     .Account    of    Dividends    ou 

Shares   In   I'oreign  Companies 132 


Table  of  Conte^'ts.  xi 

100.  Foreign     C'onipanipa  —  Statutory     Method     of     Calculating 

Statutory    Income    l:{2 

101.  How   sliall   the   Business  of   Foreign   Companies   Transacted 

In    the     United    States    Be    Distinguished    From    That 
Transacted  In  Foreign  Countries l;5;! 

102.  Meaning  of  Business  Transacted  Within  the  United  States.    l.'J.! 

103.  Meaning  of  Capital  Invested  Witliin  the  United  States....    1.34 

104.  Statutory  Enumeration  of   Deductions  From   Gross   Income 

by    Foreign    Companies 1.1 1 

105.  What   Are    Ordinary    and    Necessary    Expenses    as    Defined 

by   the   Act i;5.-, 

106.  What  Losses  Are  Proper  Subjects  of  Deduction l;!.") 

107.  What  Interest  May  Lawfully  Be  Deducted  From  Gross  In- 

come         1  ;•,.") 

108.  What  Taxes  May  Properly  Be  Charged  Against  the  Gross 

Income     135 

109.  W^hat  Dividends  May  Be  Deducted  From  Gross  Income.  .  .  .    135 

110.  Special  Provision  for  Assessment  Insurance  Companies....    136 

CHAPTER  VII. 

CORRECTIONS   AND    REVISIONS   OF   RETURNS. 

Sbction  111.  Transmission   of   the   Return 137 

112.  Penalty  for  Failure  to  Make  Return 137 

113.  Power  of  Collectors   of  Internal   Revenue  to  Reject  Incom- 

plete   Returns    13S 

114.  Power    of    Commissioner    of    Internal    Revenue    to    Require 

Correct  Returns    138 

115.  Evidence  Required  Upon  Which  to  Base  An  Order  for  Cor- 

rected Returns    1  :?fl 

116.  Power    of    Commissioner    of    Internal    Revenue    to    Require 

Additional  Information  to  Be  Furnished l.>!> 

117.  Power   of    Commissioner   of   Internal   Revenue    to   Examine 

Company   Books    MO 

118.  Power  of  Commissioner  of  Internal  Revenue  to  Take  Testi- 

mony        HO 

119.  Powers  of  Commissioners  In  Taking  Testimony 140 

120.  Attendance   of   Witnesses   Before    the   Commissioner  —  How 

Secured    141 

121.  Examination  of  Company's  Books  —  How  Secured 141 

122.  What    Courts   Have   Jurisdiction   to    Punish    Witnesses   for 

Refusal  to  Attend  Before  Commissioners 142 

123.  What  Witnesses  May  Be  Compelled  to  Testify  and  to  Pro- 

duce Books   1 42 

124.  Power    of     Commissioner    of     Internal     Revenue    to    Make. 

Amend  or   Correct   Returns  Uj)on  Evidence  Taken   I'nder 
His    Direction     142 

125.  Statutory  Limitation  of  Time  for  tlie  Correction  of  Returns   1-13 

126.  Penalties  for  Erroneous  or  False  and  Fraudulent  Tveturns.  .    143 


xii  Table  of  Contents. 

127.  Are  the  Returns  Public  Records 148 

128.  Statutory    Protection    Against    Disclosure    of    Contents    or 

Returns    146 

CHAPTEK  VIII. 

ASSESSMENT  OF  THE  FEDERAL  CORPORATION  TAX. 

Section   129.  Assessment  —  General    Remarks   Thereon 147 

130.  Powers  and  Duties  of  Commissioner  In  Making  Assessment  147 

131.  Statutory  Definition  of  Amount  of  Assessment 148 

132.  Time  Within  Which  Assessment  Must  Be  Made 148 

133.  Notice   of   Assessment 148 

134.  When  Assessment  Becomes  Due  and  Payable 149 

135.  Legal    Effect    of    Making    Payment    of    Assessment    Under 

Protest    149 

136.  Form  of  Protest 152 

CHAPTER  IX. 

COLLECTION  OF   FEDERAL  CORPORATION   TAX. 

Section  137.  Collection  of  the  Tax  —  General  Remarks  Thereon 153 

138.  To  What  Extent  Is  the  Tax  a  Lien 154 

139.  Enumeration  of  Statutory  Methods  for  Collecting  the  Tax.  .  155 

140.  Levy  Upon  and  Sale  of  Personal  Property 156 

141.  Attachment  and  Sale  of  Real  Estate 158 

142.  Action   of    Debt 162 

143.  Powers  of  the  Secretary  of  the  Treasury  In  the  Collection 

of  the  Tax , 163 

144.  Powers  of  Commissioner  of  Internal  Revenue  in  the  Collec- 

tion of  Tax 164 

145.  Powers  of  Collectors  of  Internal  Revenue  In  the  Collection 

of  the  Corporation   Tax 165 

146.  Rules   and   Regulations   of    the    Secretary   of    the   Treasury 

With  Reference  to  the  Collection,  Remission  and  Refund 

of  the  Federal  Corporation  Tax 169 

CHAPTEK  X. 

COURT  PROCEDURE. 

Section  147.  General    Remarks   Thereon 171 

148.  Remedy  by  Appeal  to  the  Commissioner  of  Internal  Revenue  171 

149.  What  Courts  Have  Power  to  Hear  Appeals  From  the  Levy- 

ing of  the  Tax 172 

150.  Romrdy  by    Fniunction 172 

151.  Romody    by   Mandamus 172 

152.  Remedy  by  Action   Against  the  Officer  for   Levys  Made  by 

Him  In  Connection  With  the  Enforcement  of  the  Tax.  .      ]~'.i 

153.  Action  to  Recover  Taxes  Paid  Under  Protest 174 


Table  of  Comtknts.  xiii 


APPENDIXES. 

APPENDIX  A. 
Text  of  Corporation  Tax  Enactment   I75 

APPENDIX  B. 

Special    Excise   Tax Ig4 

Treasury  Department  Regulation  No.   1534.      (Aug.  21,  1909.) 

APPENDIX  C. 

Assessment  and  Collection  of  Special   Excise  Tax 180 

Treasury   Department   Regulation   No.    1571.      (Dec.   3,    1909.) 

APPENDIX  D. 

I]xcise    Tax    196 

Treasury   Department  Regulation   No.    1578.      (Jan.   4,   1910.) 

APPENDIX  E. 

Gross  Income  of  Corporation 198 

Treasury  Department  Regulation  No.   1583.      (Jan.   18,   1910.) 

APPENDIX   F. 

Returns    of    Corporations 199 

Treasury  Department  Regulation  No.   1588.      (Jan.  24,  1910.) 

APPENDIX  G. 

Excise   Tax    202 

Treasury  Department  Regulation   No.    1592.      (Feb.   5,    1910.) 

APPENDIX  H. 

Excise  Tax  —  Publicity   Clause 203 

Treasury  Department  Regulation  No.    1594.      (Feb.   17,  1910.) 

APPENDIX  I. 

Indebtedness  Secured  by  Mortgage  on  Real  Estate  Purchased  by  Corpora- 
tions        204 

Treasury  Department  Regulation  No.   1595.      (Feb.  28,  1910.) 

APPENDIX  J. 

Foreign  Steamship  Companies  Engaged  In  Transporting  Freight  or  Pas- 
sengers Between  American  and  Foreign   Ports 205 

Treasury  Department  Regulation  No.  1600.      (March   14.   1010.) 


xjv  Table  of  Contents. 

APPENDIX  K. 

Classes  of  Corporations,  etc.,  Subject  to  Tax 206 

Treasury  Department  Regulation  No.  1606.      (March  29,  1910.) 

APPENDIX  L. 

Instructions  to  Collectors  of  Internal  Revenue 211 

Treasury  Department  Regulation  No.   1611.      (April  4,   1910.) 

APPENDIX  M. 

Instructions  to  Collectors  of  Internal  Revenue 212 

Treasury   Department  Regulation  No.   1615.      (April   15,   1910.) 

APPENDIX  N. 

Decision  in  Stegall  r.  Thurman 213 

Treasury  Department  Regulation  No.   1616. 

APPENDIX  0. 

Examination  of  Books  Belonging  to  Corporations 217 

Treasury  Department  Regulation  No.   1617.      (April   19,   1910.) 

APPENDIX  P. 

Additional  Notice  to  Be  Sent  to  Delinquent  Corporations 219 

Treasury  Department  Regulation  No.   1633.      (May  27,   1910.) 

APPENDIX  Pi. 

State,  County  and  Municipal  Corporations  Not  Liable  to  Tax 220 

Treasury   Department   Regulation   No.    1634.      (May  27,    1910.) 

APPENDIX  Q. 

Special  Instructions  to  Collectors  of  Internal  Revenue 221 

Treasury  Department  Regulation   No.    1639.      (June   13.    1910.) 

APPENDIX   n. 

Five  Per  Cent.    Penalties 222 

Treasury  Department  Regulation   No.   1(!51.      (Aug.  27.   1910.) 

APPENDIX  S. 

Real  Estate  Sold   ('ndcr  Warrant  of  Distraint 223 

Treasury   D<'[)artni('nt   Kogulation   No.    1654.      (Sept.    16,    1910.) 

APPENDIX  T. 

ReturnR  by  Mutual  Muilding  and   Loan  .Associfitiona 224 

Treasury    I)<-j)artnient  Regulation   No.    1655.      (Sept.   24.    1910.) 


Table  of  Contents.  xv 

APPENDIX  U. 

Instructions  Relative  to  Preparation  of  Account 225 

Treasury  Department  Regulation  No.   1656.      (Oct.  6,   1910.) 

APPENDIX  V. 

Five   Per  Cent.   Penalty  and   Interest  on   Delayed   Payments   of   Assessed 

Taxes    226 

Treasury   Department  Regulation  No.   1659.      (Oct.  20,   1910.) 

APPENDIX  W. 

Blank   Forms  for  Returns  to  Be  Furnished  by  Corporations   Making  Re- 
turns       227 

Treasury  Department   Regulation  No.   1664.      (Nov.    17,   1910.) 

APPENDIX  X. 

Inspection  of  Returns  of  Corporations 228 

Treasury  Department  Regulation  No.   1665.      (Nov.  28,  1910.) 

APPENDIX  Y. 

Synopsis  of  Decisions  Relating  to  Special  Excise  Tax  on  Corporations.  .  .  .   231 
Treasury  Department  Regulation  No.   1675.      (Feb.   14,  1911.) 

APPENDIX  Z. 

United  States  Supreme  Court  Decision  In  Flint  v.  Stone  Tracy  Co.,  et  al..   2.39 
Treasury  Department  Regulation  No.   1685.      (March   13,  1911.) 

APPENDIX  AA. 

Opinion  of  the  United  States  Supreme  Court  in  Eliot  r.  Freeman  et  al .  .    240 
Treasury  Department  Regulation  No.  1686.     (March  20,   1911.) 

APPENDIX  BB. 
Opinion   of  the  United   States   Supreme   Court   in   Zonne   v.   Minneapolis 

Syndicate  et  al 243 

Treasury  Department  Regulation  No.   1687.      (March   20,   1911.) 

APPENDIX  CC. 

Opinion  of  Attorney-General  Under  Date  of  Jan.  13,  1910 245 

January  13,  1910. 

APPENDIX  DD. 

Opinion  of  Attorney-General  Under  Date  of  Jan.  24,  1910 247 

January  24,  1910. 


xvi  Table  of  Contents. 

APPENDIX  EE. 

Opinion  of  Attorney-General  Under  Date  of  Feb.  14,  1910 249 

February  14,  1910. 

APPENDIX  FF. 

Opinion  of  Attorney-General  Under  Date  of  Feb.  21,  1910 255 

February  21,  1910. 

APPENDIX  GG. 

Opinion  of  Attorney-General  Under  Date  of  March  9,  1910 257 

March  9.  1910. 

APPENDIX  HH. 

Opinion  of  Attorney-General  Under  Date  of  March  31,  1910 262 

March  31,  1910. 

APPENDIX  II. 

Opinion  of  Attorney-General  Under  Date  of  April  2,  1910 265 

April  2,  1910. 

APPENDIX  JJ. 

Form  of  Return  by  Insurance  Companies 268 

Form  No.  634. 

APPENDIX  KK. 

Form  of  Return  by  Banks  and  Other  Financial  Institutions 270 

Form  No.  635. 

APPENDIX  LL. 

Form  of  Return  by  Transportation  Corporations 272 

Form  No.  636. 

APPENDIX  MM. 

Form  of  Return  by  Manufacturing  Corporations 274 

Form  No.  637. 

APPENDIX  NN. 

Form  of  Return  by  Mercantile  Corporations 276 

Form  No.  639. 

APPENDIX  00. 

Form  of  Return  by  MiHcelJaneous  Corporations 278 

Form  No.  638. 


Tablk  of  Contents.  xvii 

APPENDIX  PP. 

Bill  of  Complaint  In  the  Case  of  Stella  P.  Flint,  as  General  Guardian  of 
the  Property  of  Samuel  N.  Stone.  Jr.,  a  Minor,  Plaintiff,  r.  Stone 
Tracy  Company  et  al.,  Defendants,  as  Filed  in  the  Circuit  Court  of  the 
United  States  for  the  District  of  Vermont  (No.  747,  October  Term, 
1909 )   In  the  Supreme  Court  of  the  United  States 280 

APPENDIX  QQ. 
Bxtracts  From  United  States  Revised  Statutes  Relative  to  Collection  of 
Internal  Revenue  Taxes 283 

APPENDIX  RR. 
The  Tucker  Act 298 


FEDERAL 

CORPORATION  TAX  LAW 


CHAPTER  I. 

NATURE    OF   THE    FEDERAL    CORPORATION    TAX    ENACTMENT. 

Sec.  1.  History  of  the  Corporation  Tax  Law  of  1909.  —  The 

so-called  ''  Federal  Corporation  Tax  Enactment "  was  the  out- 
come of  political  forces  which  brought  about  the  engrafting  of  a 
corporation  tax  rider  upon  the  so-called  Payne  Tariff  Act  of 
1909. 

Immediately  after  the  inauguration  of  President  Taft  he  called 
Congress  in  extraordinary  session  for  the  purpose  of  revising  the 
Dingley  Tariff  Act.  Wliile  the  new  tariff  act  was  under  discus- 
sion before  Congress  a  strong  effort  was  made  to  incorporate  in 
the  new  tariff  act  a  provision  for  a  tax  upon  both  individual  and 
corporate  incomes.  Partly  as  a  compromise  and  partly  because 
of  the  inherent  fear  on  the  part  of  the  dominant  party  that  the 
new  tariff  act  would  not  be  sufficient  to  produce  the  revenue 
needed  for  proper  governmental  purposes,  the  Federal  Corpora- 
tion Tax  Enactment  was  proposed  and  ultimately  became  a  law. 
It  became  a  law  August  5,  1909.  The  tax  itself  is  embodied  in 
a  single  section  of  the  Payne  Tariff  Act,  the  same  being  numbered 
as  section  38.  See  U.  S.  Kevised  Statutes  1909,  pp.  11-112- 
117 ;  also  Appendix  A. 

Fed.  Corp.  Tax  —  1  [1] 


2  Federal  Cobpoeation  Tax  Law. 

Sec.  2.  The  Tax  Is  Undoubtedly  an  Excise  Tax.  —  The  Cor- 
poration Tax  Act  (section  1)  attempts  to  characterize  its  own 
nature  when  it  declares  that  certain  corporations  named  in  the 
act  shall  be  subject  to  pay  annually  a  special  excise  tax  with 
reference  to  the  carrs'ing  on  or  doing  business  by  such  corpora- 
tions, joint  stock  companies  or  associations  or  insurance  company. 
The  subject  of  the  tax  is  thus  by  statute  clearly  defined  to  be  the 
carrying  on  or  doing  business  by  the  several  classes  enumerated 
in  the  act. 

Neither  the  properties  of  corporations  or  their  franchises  are 
made  the  subject  of  the  tax.  Indeed,  so  far  as  their  property  or 
franchises  are  concerned,  it  is  only  their  use  as  instruments  of 
business  that  are  made  the  subject  of  the  tax.  Of  course  the 
specific  designation  of  the  tax  as  a  special  excise  in  the  act  itself 
is  by  no  means  conclusive  upon  the  courts  in  determining  the 
nature  of  the  tax  attempted  to  be  levied  by  Congress. 

The  tax  is  not  an  "  income  tax,"  as  that  word  is  used  in  the 
United  States  Constitution.  It  only  becomes  necessary  to  ascer- 
tain the  income  of  the  business  of  the  various  companies  made 
subject  to  tlie  tax  in  order  to  furnish  a  means  of  measuring  the 
amount  of  the  tax,  which  in  its  turn  is  based  not  upon  that  income, 
but  upon  the  occupation  from  which  it  is  derived. 

That  the  tax  is  strictly  a  piece  of  excise  legislation  is  shown 
conclusively  by  the  decision  of  the  Supreme  (\)urt  in  Flint  v. 
Stone  Tracey  &  Com])any  et  al.  (decided  by  the  United  States 
Supreme  Cuurt,  Mardi  l-'5,  IDll)  wliorc  it  was  said  tliat: 

"  Wlii](^  tlie  mere  declaration  contained  in  a  statulc  tliat  it  shall  he  regarded 
aa  a  tax  of  a  parlicular  character  does  not  make  it  such  if  it  is  apparent  that 
it  canndt  l>e  so  dosij^'natcd  consistently  with  the  meaning  and  elTect  of  the  act, 
ncvertheles-i  the  (h'claration  of  the  lawmaking  power  is  entitled  to  much 
weight,  and  in  this  statute  the  intention  is  expressly  declared  to  impose  a 
special  excise  tax  with  respect  to  the  carrying  on  or  doing  business  by  such 
corpnrati'in.  joint  stock  company  or  association  or  company.  It  is  tlierefore 
appar<nt,  giving  all  the  words  of  the  statute  efTeet,  that  the  tax  is  impos4'd 
not  upon  the  franchises  of  the  corporation  irrespective  of  their  use  in  husi 
nesH,  nor  upon  the  property  of  the  corporation,  but  iipon  the  doing  of  cor 
porate  fir  irisurancf  l)\isiness,  and  with  respect  to  the  carrying  on  thereof,  in 
a  sum  <'quivalent  to  one  per  centiim  upon  the  entire  net  income  over  and  above 
ifS.non  received  from  all  sources  during  the  year;  1h;it  is,  when  imposed  in 
thi«  manner  it  is  n  tax  upon  the  doing  of  business  with  the  advantages  which 
inhere    in    the    peculiarities   of   corporate'    or    joint   stock   organization    of    th« 


Mature  of  Jb  jiJUKUAi.  Cokporation  Tax  Enactment.       li 

■cliaracter  descrilx-d.  As  the  latter  organizations  share  many  benefits  of  cor- 
porate organization,  it  may  be  described  g<'n«'rally  as  a  tux  U[)nn  the  doing  of 
business  in  a  corporate  capacity.  In  the  case  of  insuranc<'  eomjianies  the  tax 
is  imposed  upon  the  transaction  of  sucli  business  by  companies  organized 
under  the  laws  of  the  United  States  or  any  State  or  Territory  as  heretofore 
stated. 

This  tax,  it  is  expressly  stated,  is  to  be  equivalent  to  one  per  centum  of  tlie 
entire  net  income  over  and  above  $5,000  received  from  all  sources  during  the 
year.  This  is  the  measure  of  the  tax  explicitly  adopted  by  the  statute*.  The 
income  is  not  limited  to  such  as  is  received  from  proixTty  used  in  the  busi- 
ness, strictly  speaking,  but  is  expressly  declared  to  be  upon  the  entire  net 
income  above  $5,000  from  all  sources,  excluding  the  amounts  received  as  divi- 
dends on  stock  in  other  corporations,  joint  stock  companies  or  associations  f)r 
insurance  companies  also  subject  to  the  tax.  In  other  words,  tlie  tax  is  im- 
posed upon  the  doing  of  business  of  the  character  described,  and  the  measure 
of  the  tax  is  to  be  the  income  with  the  deduction  stated,  received  not  only 
from  property  used  in  business,  but  from  every  source.  This  view  of  the 
measure  of  the  tax  is  strengthened  when  we  note  that  as  to  organizations 
under  the  laws  of  foreign  countries  the  amount  of  net  income  over  and  above 
$5,000  includes  that  received  from  business  transacted  and  capital  invested 
in  the  United  States,  the  Territories,  Alaska,  and  the  District  of  Columbia. 

It  is  further  strengthened  when  the  subsequent  sections  are  considered  as 
to  deductions  in  ascertaining  net  income  and  requiring  returns  from  those 
subject  to  the  act.  Under  the  second  paragraph  the  net  income  is  to  be  ascer- 
tained by  certain  deductions  from  the  gross  amount  of  income  received  within 
the  year  "  from  all  sources ;  "  and  the  return  to  be  made  to  the  collector  of 
internal  revenue  under  the  third  section  is  required  to  sliow  the  gross  amount 
of  the  income  received  during  the  year  "  from  all  sources."  The  evident 
purpose  is  to  secure  a  return  of  the  entire  income  derived  from  property 
actively  engaged  in  the  business.  This  interpretation  of  the  act,  as  resting 
upon  the  doing  of  business  is  sustained  by  the  reasoning  in  Spreckels  Sugar 
Refining  Co.  v.  McClain,  192  U.  S.  397,  in  which  a  special  tax  measured  by 
the  gross  receipts  of  the  business  of  refining  oil  and  sugar  was  sustained  as 
an  excise  in  respect  to  the  carrying  on  or  doing  of  such  business."  (220 
U.  S.   107.) 

Sec.  3.  The  Federal  Corporation  Tax  Is  Not  a  Franchise 
Tax.  —  No  tax  is  imposed  upon  any  corporation  or  association 
unless  it  has  actually  done  business  within  the  period  of  time 
designated  in  the  act.  Therefore,  franchise  cannot  be  the  subject- 
matter  of  the  tax.  In  this  connection  a  distinction  is  to  be  drawn 
between  the  tax  on  franchises  as  privileges,  and  taxes  on  franchises 
as  property.  (See  1  Cooley  on  Taxation,  pp.  C76,  677,  ()Sn.) 
Even  if  the  corporation  tax  under  discussion  be  admitted  pro 
arguendo  to  rest  directly  on  the  franchises  of  the  cornorntious  in- 
cluded in  the  act,  the  tax  is  to  be  rerrarded  as  a  privilege  tax  and 


4  Federal  Cobporation  Tax  Law. 

not  a  property  Uix.  On  this  subject  the  United  States  Supreme 
Court  in  Stella  P.  Flint  v.  Stone  Tracey  Company  (218  U.  S. 
107),  spoke  as  follows: 

It  is  next  contended  that  the  attempted  taxation  is  void  because  it  levies 
a  tax  upon  the  exclusive  right  of  a  state  to  grant  corporate  franchises,  be- 
cause it  taxes  franchises  which  are  the  creation  of  tlie  State  in  its  sovereign 
right  and  authority.  This  proposition  is  rested  upon  the  implied  limitation 
upon  the  powers  of  national  and  state  governments  to  take  action  which 
encroaches  upon  or  cripples  the  exercise  of  the  exclusive  power  of  sovereigntj 
in  the  other.  It  has  been  held  in  a  number  of  cass  that  the  State  cannot  tax 
franchises  created  by  the  United  States  or  the  agencies  or  corporations  which 
are  created  for  the  purpose  of  carrying  out  governmental  functions  of  the 
United  States.  McCulloch  v.  Maryland,  4  Wheat.  316;  Osborn  v.  Bank, 
9  Wheat.  738;  Railroad  Co.  V.  Peniston,  18  Wall.  5;  California  v.  Central 
Pac.  R.  R.  Co.,  127  U.  S.  1. 

An  examination  of  th-^se  cases  will  show  that  in  each  case  where  the  tax 
was  held  invalid  the  decision  rested  upon  the  proposition  that  the  corporation 
was  created  to  carry  into  effect  powers  conferred  upon  the  federal  government 
in  its  sovereign  capacity,  and  the  attempted  taxation  was  an  interference 
with  the  effectual  exercise  of  such  powers. 

In  Osborn  v.  The  Bank,  supra,  a  leading  case  upon  the  subject,  whilst  it 
was  held  that  the  Bank  of  the  United  States  was  not  a  private  corporation, 
but  a  public  one,  created  for  national  purposes,  and  therefore  beyond  the 
taxing  power  of  the  State,  Chief  Justice  Marshall,  in  delivering  the  opinion 
of  the  court,  conceded  that  if  the  corporation  had  been  originated  for  the 
management  of  an  individual  concern,  with  private  trade  and  profit  for  its 
great  end  and  principal  object,  it  might  be  taxed  by  the  State.  Said  the 
Chief  Justice: 

"  If  these  premises  (that  the  corporation  was  one  of  private  character)  were 
true,  the  conclusion  drawn  from  them  would  be  inevitable.  This  mere  private 
corporation,  engaged  in  its  own  business,  witli  its  own  views,  would  certainly 
be  subject  to  the  taxing  power  of  the  State,  as  any  individual  would  be;  and 
the  casual  circumstance  of  its  Ix-ing  employed  by  the  government  in  the  trans- 
action of  it«  fiscal  affairs  would  no  mere  exempt  its  private  business  from  the 
operation  of  that  power  than  it  would  exenij)t  tlie  private  business  of  any 
individual  employed  in  the  same  manner." 

The  inquiry  in  this  connection  is:  How  far  do  the  implied  limitations 
upon  the  taxing  power  of  the  United  States  over  objerla  which  would  other- 
wise be  legitimate  subjects  of  federal  taxation,  withdriiw  tluiii  from  the  reach 
of  the  federal  government  in  raising  revenue,  because  they  are  pursued  under 
franchispH  which   are   the   erciitidti   of   the   St:it<'s? 

In  approaching  this  subjct  we  must  reineinbcr  that  enactments  levying 
taxes,  as  other  laws  of  the  federal  gnvernmont  when  acting  within  constitu- 
tional authority,  are  the  supreme  law  of  the  land.  The  Constitution  contains 
only  two  limiliitions  on  the  ri|.rht  of  Pongress  to  levy  excise  tnxes;  they  must 
be  levied  for  the  publie  welfare  and  are  required  to  be  uniform  throngliout 
file  T'nited  States.  As  Mr.  Chief  .Tustiee  Chase  said,  speaking  for  the  court 
in   I.icnH.'  Tax  Cases,  ft  Wall.  4(12,  471: 


Naturk  of  Fkukrai.  Cokporation  Tax   K.vactment.       5 

"  Congress  cannot  tax  exports,  and  it  must  impose  direct  taxes  by  the  rule 
of  apportionment,  and  indirect  taxes  by  the  rule  of  uniformity.  Thus  lim- 
ited, and  thus  only,  it  reaches  every  subject  and  may  be  exercised  at  dis- 
cretion." 

The  limitations  to  which  the  chief  justice  refers  were  the  only  ones  imposed 
in  the  Constitution  upon  tlie  taxing  power. 

In  McCray  v.  United  States,  195  U.  S.  27,  this  court  sustained  a  federal 
tax  on  oleomargarine,  artificially  colored,  and  held  that  while  the  fifth  and 
tenth  amendments  qualify,  so  far  as  applicable  all  the  provisions  of  the  Con- 
stitution, nothing  in  those  amendments  operates  to  take  away  the  power  to 
tax  conferred  by  the  Constitution  on  the  Congress.  In  that  case  it  was  con- 
tended that  the  subject  taxed  was  within  the  exclusive  domain  of  the  States, 
and  that  the  real  purpose  of  Congress  was  not  to  raise  revenue  but  to  tax 
out  of  existence  a  substance  not  harmful  of  itself,  and  one  which  might  be 
lawfully  manufactured  and  sold;  but  the  only  constitutional  limitation  which 
this  court  conceded,  in  addition  to  the  requirements  of  uniformity,  and  that 
for  the  sake  of  argument  only  so  far  as  concerned  the  case  then  under  con- 
sideration, was  that  Congress  is  restrained  from  arbitrary  impositions  or  from 
exceeding  its  powers  in  seeking  to  effect  unwarranted  ends.  The  limitation 
of  uniformity  was  deemed  sufficient  by  those  who  framed  and  adopted  the 
Constitution.  The  courts  may  not  add  others.  Patton  v.  Brady,  184  U.  S. 
e08,  622.  And  see  United  States  v.  Singer,  15  Wall.  Ill,  121 ;  Nicoll  v.  Ames, 
173  U.  S.  509,  515. 

We  must,  therefore,  enter  upon  the  inquiry  as  to  implied  limitations  upon 
the  exercise  of  the  federal  authority  to  tax  because  of  the  sovereignty  of  the 
States  over  matters  within  their  exclusive  jurisdiction,  having  in  view  the 
nature  and  extent  of  the  power  specifically  conferred  upon  Congress  by  the 
Constitution  of  the  United  States.  We  must  remember,  too,  that  the  rev- 
enues of  the  United  States  must  be  obtained  in  the  same  territory,  from  th© 
name  people,  and  excise  taxes  must  be  collected  from  the  same  activities  as 
are  also  reached  by  the  States  in  order  to  support  their  local  government. 


Sec.  4.  The  Tax  Is  Not  a  Direct  Tax  Upon  Shares  or  the 
Income  Thereof.  —  The  tax  is  not  a  direct  tax  upon  shares  of  the 
stockholders  in  the  companies  to  the  business  of  which  the  tax 
attaches,  or  upon  the  income  of  such  stockholders  from  their 
shares.  On  this  subject  the  United  States  Supreme  Court  in 
Stella  P.  Flint  v.  Stone  Tracey  &  Company  (220  U.  S.  107), 
speaks  as  follows : 

In  Home  Ins.  Co.  v.  New  York,  134  U.  S.  504,  a  tax  was  sustained  upon  the 
right  or  privilege  of  the  Home  Insurance  Company  to  be  a  corporation  and 
to  do  business  within  the  State  in  a  corporate  capacity,  the  tax  being  meas- 
ured by  the  extent  of  the  dividends  of  the  corporation  in  the  current  year 
upon  the  capital  stock.  Although  a  very  large  amount,  nearly  two  or  thre^* 
millions  of  capital  stock,  was  invested  in  bonds  of  the  Ignited  States  expressly 
exempted  from  taxation  by  a  statute  of  the  United  States,  the  tax  was  sus- 


6  Federal  Corporation  Tax  Law. 

tained  as  a  mode  of  measurement  of  a  privilege  tax  which  it  was  within  the 
lawful  authority  of  the  State  to  impose.  Mr.  Justice  Field,  who  delivered  the 
opinion  of  the  court,  reviewed  the  previous  cases  in  this  court,  holding  that 
the  State  could  not  tax  or  burden  the  operation  of  the  Constitution  and  of 
laws  enacted  by  the  Congress  to  carry  into  execution  the  powers  vested  in  the 
general  government.  Yielding  full  assent  to  those  cases,  Mr.  Justice  Field 
said  of  the  tax  then  under  consideration: 

"  It  is  not  a  tax  in  terms  upon  the  capital  stock  of  the  company,  nor  upon 
any  bonds  of  the  United  States  composing  a  part  of  that  stock.  The  statute 
designates  it  a  tax  upon  the  '  corporate  franchise  or  business  '  of  the  com- 
pany, and  reference  is  only  made  to  its  capital  stock  and  dividends  for  the 
purpose  of  determining  the  amount  of  the  tax  to  be  exacted  each  year." 

In  that  case,  in  the  course  of  the  opinion,  previous  cases  of  this  court  were 
cited  with  approval.  Society  for  Savings  v.  Coit,  6  Wall.  594;  Provident 
Institution  v.  Massachusetts,  6  Wall.  611. 

In  the  Coit  case  a  privilege  tax  upon  the  total  amount  of  deposits  in  a 
savings  bank  was  sustained,  although  $500,000  of  the  deposits  had  been  in- 
vested in  securities  of  the  United  States  and  declared  by  Act  of  Congress  to 
be  exempt  from  taxation  by  State  authority.     In  that  case  the  court  said: 

"  Nothing  can  be  more  certain  in  legal  decision  than  that  the  privileges  and 
franchises  of  a  private  corporation  and  all  trades  and  avocations  by  which  the 
citizens  acquire  a  livelihood,  may  be  taxed  by  a  State  for  the  support  of  th" 
State  government.  Authority  to  that  effect  resides  in  the  State  independently 
of  the  federal  government,  and  is  wholly  unaffected  by  the  fact  that  the  cor- 
poration or  individual  has  or  has  not  made  investment  in  federal  securities." 
In  Provident  Institution  v.  Massachusetts,  supra,  a  like  tax  was  sustained. 
It  is,  therefore,  well  settled  by  the  decisions  of  this  court  that  when  the  sov 
ereign  authority  has  exercised  the  right  to  tax  a  legitimate  subject  of  taxa- 
tion as  an  exercise  of  a  franchise  or  privilege,  it  is  no  objection  that  the 
measure  of  taxation  is  found  in  the  income  produced  in  part  from  property 
which  of  itself  considered  is  nontaxable.  Applying  that  doctrine  to  this  case 
the  measure  of  taxation  being  the  income  of  the  corporation  from  all  sources, 
as  that  is  but  the  measure  of  a  privilege  tax  within  the  lawful  authority  of 
Congress  to  impose,  it  is  no  valid  objection  that  this  measure  includes,  in  part 
at  least,  property  which  as  such  could  not  be  directly  taxed.  See  in  this 
connection  Maine  V.  Grand  Trunk  Ry.,  142  U.  S.  217,  as  interpreted  in  Gal 
veston,  Ilarrisburg  A  San  Antonio  Ry.  Co.  v.  Texas,  210  U.  S.  217,  226. 

Sec.  5.  The  Tax  Is  Not  a  Direct  Tax  Even  in  the  Case  of 
Companies  Rnj^ajjed  Mainly  or  Wholly  in  the  Business  of 
Handling  or  Dealing  in  Real  Estate.  —  The  tax  under  disciia- 
<ioii  clciirlv  (l(K's  not  Ix'coiiic  (liroot  nicrclv  hv  reason  of  the  fact 
tli;it  tlic  coiiipanios  who  arc  rcciuircd  ti>  pay  tlie  tax  clianoe  to  bo 
(•nj;afje<|  maiidv  or  oven  wholly  in  tlic  business  of  handling'  or 
(h'alinir  in  real  estate.  'I'lic  l'nitc(l  States  Supreme  Court,  on  this 
subject,  in  Flint  v.  Stone  Tracey  &  Co.  (220  U.  S.  107),  s|K>ke 
as  follows: 


Nature  of  Fedebal  Corporation  Tax  Enactmej^t.       7 

It  is  especially  objected  that  certain  of  the  corporations  whose  stockholder* 
challenge  the  validity  of  the  tax  are  so-called  real  estate  companies,  whose 
business  is  principally  the  holding  and  management  of  real  estate.  These  cases 
are  No.  415,  Cedar  Street  Co.  v.  Park  Realty  Co.;  No.  431,  Percy  H.  Brundage 
V.  Broadway  Realty  Co.;  No.  443,  Phillips  v.  Fifty  Associates  et  al.j  No.  44G, 
Mitchell  V.  Clark  Iron  Co.;  No.  412,  William  H.  Miner  v.  Corn  Exchange 
Bank  et  al.,  and  No.  457,  Cook  et  al.  v.  Boston  Wharf  Co. 

In  No.  412,  Miner  v.  Corn  Exchange  Bank  et  al.,  the  bank  occupies  a  build 
ing  in  part  and  rents  a  large  part  to  tenants. 

Of  the  realty  companies  the  Park  Realty  Company  was  organized  to  "  work, 
develop,  sell,  convey,  mortgage,  or  otherwise  dispose  of  real  estate;  to  lease, 
exchange,  hire,  or  otherwise  acquire  property;  to  erect,  alter,  or  improve 
buildings;  to  conduct,  operate,  manage,  or  lease  hotels,  apartment  houses, 
etc. ;  to  make  and  carry  out  contracts  in  the  manner  specified  concerning 
buildings  ♦  »  *  and  generally  to  deal  in,  sell,  lease,  exchange,  or  other- 
wise deal  with  lands,  buildings,  and  other  property,  real  or  personal,"  etc. 

At  the  time  the  bill  was  filed  the  business  of  the  company  related  to  the 
Hotel  Leonori  and  the  bill  averred  that  it  was  engaged  in  no  other  business 
except  the  management  and  leasing  of  the  hotel. 

The  Broadway  Realty  Company  was  formed  for  the  purpose  of  owning,  hold- 
ing, and  managing  real  estate.  It  owns  an  office  building  and  certain  secu- 
rities. The  office  building  is  let  to  tenants,  to  whom  light  and  heat  are 
furnished,  and  for  whom  janitor  and  similar  services  are  performed. 

The  Fifty  Associates  are  operating  under  a  charter  to  own  real  estate  with 
power  to  build,  improve,  alter,  pull  down,  and  rebuild,  and  to  manage, 
exchange,  and  dispose  of  the  same. 

The  Clark  Iron  Company  was  organized  under  the  laws  of  Minnesota,  owns 
and  leases  ore  lands  for  the  purpose  of  carrying  on  mining  operations,  and 
receives  a  royalty  depending  upon  the  quantity  of  ore  mined. 

The  Boston  Wharf  Company  is  operating  under  a  charter  authorizing  it  to 
acquire  lands  and  flats,  with  their  privileges  and  appurtenances,  and  to  lease, 
manage,  and  improve  its  property  in  whatever  manner  shall  be  deemed  ex- 
pedient by  it,  and  to  receive  dockage  and  wharfage  for  vessels  laid  at  its 
wharfs.  What  we  have  said  as  to  the  character  of  the  corporation  tax  as  an 
excise  tax  disposes  of  the  contention  that  it  is  direct  and  therefore  requiring 
apportionment  by  the  Constitution. 

Sec.  6.  The  Federal  Corporation  Tax  Is  Not  in  the  Nature 
of  an  Infraction  Upon  the  General  Powers  of  the  States  to 
Authorize  the  Formation  of  Corporations  and  Joint  Stock 
Companies.  —  That  the  Federal  Coryxjration  Tax  is  not  an  infrac- 
tion of  the  general  power  of  the  States  to  authorize  the  formation 
of  corporations  and  joint  stock  companies  is  fully  sustained  by  the 
decisions  of  the  United  States  Supreme  Court. 

Fn  Veazie  Bank  v.  Fenno,  8  Wall.  533,  547,  that  court  spoke 
as  follows : 


8  Federal  Corpoeation  Tax  Law. 

It  it,  then,  a  tax  on  a  franchise  granted  by  a  State,  which  Congress,  upoM 
any  principle  exempting  the  reserved  powers  of  the  States  from  impairment 
by  taxation,  must  be  held  to  have  no  authority  to  lay  and  collect? 

We  do  not  say  that  there  may  not  be  such  a  tax.  It  may  be  admitted  that 
the  reserved  rights  of  the  States,  such  as  the  right  to  pass  laws,  to  give 
effect  to  laws  through  executive  action,  to  administer  justice  through  ex- 
ecutive action,  to  administer  justice  through  the  courts,  and  to  employ  all 
necessary  agencies  for  legitimate  purposes  of  State  government,  are  not  proper 
subjects  of  the  taxing  power  of  Congress.  But  it  cannot  be  admitted  that 
franchises  granted  by  a  State  are  necessarily  exempt  from  taxation;  for 
franchises  are  property,  often  very  valuable  and  productive  property;  and 
when  not  conferred  for  the  purpose  of  giving  effect  to  some  reserved  power 
of  a  State,  seem  to  be  as  properly  objects  of  taxation  as  any  other  property. 

But  in  the  case  before  us  the  object  of  taxation  Is  not  the  franchise  of  the 
bank,  but  property  created,  or  contracts  made  and  issued  under  the  franchise, 
or  power  to  issue  bank  bills.  A  railroad  company,  in  the  exercise  of  its  cor- 
porate franchises,  issues  freight  receipts,  bills  of  lading,  and  passenger  tickets, 
*nd  it  cannot  be  doubted  that  the  organization  of  railroads  is  quite  as  im- 
portant to  the  State  as  the  organization  of  banks.  But  it  will  hardly  be 
questioned  that  these  contracts  of  the  company  are  objects  of  taxation  within 
the  powers  of  Congress,  and  not  exempted  by  any  relation  to  the  State  which 
granted  the  charter  of  the  railroad.  And  it  seems  difficult  to  distinguish  the 
taxation  of  notes  issued  for  circulation  from  the  taxation  of  these  railroad 
eontracts.  Both  descriptions  of  contracts  are  means  of  profit  to  the  corpo- 
rations which  issue  them;  and  both  as  we  think  may  properly  be  made  con- 
tributory to  the  public  revenue.     Pages  547,  648. 

On  this  subject  the  United  States  Supreme  Court  in  Flint  v. 
Stone  Tracey  &  Co.  (220  U.  S.  107),  spoke  as  follows: 

While  the  tax  in  this  case,  as  we  have  construed  the  statute,  is  upon  the 
exercise  of  the  privilege  of  doing  business  in  a  corporate  capacity,  as  such 
business  is  done  under  authority  of  State  franchises,  it  becomes  necessary  to 
consider  in  this  connection  the  right  of  the  federal  government  to  tax  the 
activities  of  private  corporations  which  ari.se  from  the  exercise  of  franchises 
granted  by  the  State  in  creating  and  conferring  powers  upon  such  corpora- 
tions. We  think  it  is  the  result  of  the  cases  heretofore  do(M(l<'(l  in  this  court 
that  such  business  activities,  though  exercised  because  of  State  created  fran- 
cliises,  are  not  beyond  the  taxing  power  of  the  United  States.  Taxes  upon 
rights  exercised  under  grants  of  State  franchises  were  sustained  by  this  court 
in  Railroad  Company  v.  Collector,  100  V.  R.  .^Of) ;  Ignited  States  v.  Erie  R.  R. 
Co.,  IOC  U.  S.  .327;  Spreckela  Sugar  Refining  Co.  v.  McClain,  102  U.  S.  .S!17. 

It  is  true  that  in  those  cases  the  question  does  not  seem  to  have  been  di- 
rectly made,  but.  in  snstaining  such  taxation,  tlie  right  of  the  federal  govern 
m^'nt  to  reach  aiich  agencies  was  nocessiirily  involvrd.  The  question  was 
raitfd  and  decided  in  the  ca.se  of  Veazie  Bank  ;•.  Fnino,  fi  Wall.  .'5.33.  In  that 
well  kiiftwn  case  a  tax  upon  the  notea  of  a  Stato  I)ank  isaiied  for  circulation 
was   «UHtnijifil.      Mr.   ('lii<f  .IiMticc  C'b.iHc,    in   <h<>   cuiirsc  of   (lio  oy)inion.   said: 

Is  it.  tlif-n.  a  tax   ou   a   franchise  grantee!  by  a  State,  wliirli   Congress  upon 


Nature  of  Fedkhal  CoBPoaATiON   Tajc  Ejsactmknt.       U 

any  principle  exempting  the  reserved  powers  of  the  States  from   impairment 
by  taxation  must  be  held  to  have  no  authority  to  lay  and  collect? 

We  do  not  say  that  there  may  not  be  such  a  tax.  It  may  be  admitted  that 
the  reserved  rights  of  the  States,  such  as  the  right  to  pass  laws,  to  give  efTect 
to  laws  through  executive  action,  to  administer  justice  through  the  courts, 
and  to  employ  all  necessary  agencies  for  legitimate  purposes  of  State  govern- 
ment, are  not  proper  subjects  of  tlie  taxing  power  of  Congress.  Hut  it  cannot 
be  admitted  that  franchises  granted  by  a  State  are  necessarily  exempt  from 
taxation ;  for  franchises  are  property,  often  very  valuable  and  productive 
property ;  and  when  not  conferred  for  the  purpose  of  giving  effect  to  some 
reserved  power  of  a  state,  seem  to  be  as  properly  objects  of  taxation  as  any 
other  property. 

But  in  the  case  before  us  the  object  of  taxation  is  not  the  franchise  of  the 
bank,  but  property  created  or  contracts  made  and  issued  under  the  franchise 
or  power  to  issue  bank  bills.  A  railroad  company,  in  the  exercise  of  its  cor 
porate  franchises,  issues  freight  receipts,  bills  of  lading,  and  passenger 
tickets;  and  it  cannot  be  doubted  that  the  organization  of  railroads  is  quite 
as  important  to  the  State  as  the  organization  of  banks.  But  it  will  hardly 
be  questioned  that  these  contracts  of  fhe  company  are  objects  of  taxation 
within  the  powers  of  Congress,  and  not  exempted  by  any  relation  to  the  State 
which  granted  the  charter  of  the  railroad.  And  it  seems  difficult  to  distin- 
guish that  taxation  of  notes  issued  for  circulation  from  the  taxation  of  these 
railroad  contracts.  Both  descriptions  of  contracts  are  means  of  profit  to  the 
eorporations  which  issue  them ;  and  both,  as  we  think,  may  properly  be  made 
•ontributory  to  the  public  revenue.     Pages  547,  548. 

It  is  true  that  the  decision  in  the  Veazie  Bank  case  was  also  placed  in  a 
measure  upon  the  authority  of  the  United  States  to  control  the  circulating 
medium  of  the  country,  but  the  force  of  the  reasoning  which  we  have  quoted 
has  not  been  denied  or  departed  from. 

In  Thomas  v.  United  States,  192  U.  S.,  supra,  a  federal  tax  on  the  transfer 
of  corporate  shares  in  State  corporations  was  upheld  as  a  tax  upon  business 
transacted  in  the  exercise  of  privileges  afforded  by  the  State  laws  in  respect 
to  corporations. 

In  Nicoll  V.  Ames,  173  U.  S.  509,  a  federal  tax  was  sustained  upon  the  enjoy- 
ment of  privileges  afforded  by  a  board  of  trade  incorporated  by  the  State  of 
Illinois. 

When  the  Constitution  was  framed  the  right  to  lay  excise  taxes  was  broadly 
tonferred  upon  the  Congress.  At  that  time  very  few  corporations  existed. 
If  the  mere  fact  of  State  incorporation,  extending  now  to  nearly  all  branches 
o/  trade  and  industry,  could  withdraw  the  legitimate  objects  of  federal  taxa- 
tion from  the  exercise  of  the  power  conferred,  the  result  would  be  to  exclude 
the  national  government  from  many  objects  upon  which  indirect  taxes  could 
be  constitutionally  imposed.  Let  it  be  supposed  that  a  group  of  individuals. 
as  partners,  were  carrying  on  the  business  upon  which  Congress  concluded  to 
lay  an  excise  tax.  If  it  be  true  that  the  forming  of  a  State  corporation  would 
defeat  this  purpose,  by  taking  the  necessary  steps  required  by  the  State  law 
to  create  a  corporation  aiid  carrying  on  the  business  under  rights  granted  by 
a  State  statute,  the  federal  tax  would  become  invalid,  and  that  source  of 
national  reyenue  be  destroyed,  except  as  to  the  business  in  the  hands  of  indi- 


10  Federal  Corporation  Tax  Law. 

viduals  or  partnerships.  It  cannot  be  supposed  that  it  was  intended  that  it 
should  be  within  the  power  of  individuals  acting  under  State  authority  to 
thus  impair  and  limit  the  exertion  of  authority  which  may  be  essential  to 
national  existence. 

In  this  connection  South  Carolina  v.  United  States,  199  U.  S.  437,  is  im- 
portant. In  that  case  it  was  held  that  the  agents  of  the  State  government, 
carrying  on  the  business  of  selling  liquor  under  State  authority,  were  liable 
to  pay  the  internal  revenue  tax  imposed  by  the  federal  government.  In  the 
opinion  previous  cases  in  this  court  were  reviewed  and  the  rule  to  be  deduced 
therefrom  stated  to  be  that  the  exemption  of  State  agencies  and  instrumentali- 
ties from  national  taxation  was  limited  to  those  of  a  strictly  governmental 
character,  and  did  not  extend  to  those  used  by  the  State  in  carrying  ou 
business  of  a  private  character.     199  U.  S.  461. 

The  cases  unite  in  exemption  from  federal  taxation  the  means  and  instni 
mentalities  employed  in  carrying  on  the  governmental  operations  of  the  State. 
The  exercise  of  such  rights  as  the  establishment  of  a  judiciary,  the  employ- 
ment of  officers  to  administer  and  execute  the  laws  and  similar  governmental 
functions  cannot  be  taxed  by  the  federal  government.     The  Collector  v.  Day, 

11  Wall.  113;  United  States  V.  R.  R.  Co.,  17  Wiall.  322;  Ambrosini  v.  United 
States,  187  U.  S.  1. 

But  this  limitation  has  never  been  extended  to  the  exclusion  of  the  activi 
ties  of  a  merely  private  business  from  the  federal  taxing  power,  although  the 
power  to  exercise  them  is  derived  from  an  act  of  incorporation  by  one  of  the 
States.     We,  therefore,  reach  the  conclusion  that  the  mere  fact  that  th":  busi 
ness  taxed  is  done  in  pursuance  of  authority  granted  by  a  State  in  the  crea 
tion  of  private  corporations  does  not  exempt  it  from  the  exercise  of  federal 
authority  to  levy  excise  taxes  upon  such  privileges. 

But  it  is  insisted  this  taxation  is  so  unequal  and  arbitrary  in  the  fact  that 
it  taxes  a  business  when  carried  on  by  a  corporation  and  exempts  a  similar 
business  when  carried  on  by  a  partnership  or  private  individual  as  to  place 
it  beyond  the  authority  ponforrod  upon  Congress.  As  wo  have  seen,  the  only 
limitation  upon  the  authority  conferred  is  uniformity  in  laying  the  tax,  and 
uniformity  does  not  require  the  equal  application  of  the  tax  to  all  persona  or 
corporations  who  may  come  within  its  operation,  but  is  limited  to  geographi- 
cal uniformity  throughout  the  United  States.  This  subject  was  fully  diu 
cussed  and  set  at  rest  in  Knowlton  r.  Moore,  178  U.  S.,  supra,  and  we  can  add 
nothing  to  the  discussion  contained  in  tliat  case. 

In  levying  excise  taxes  the  most  ample  authority  has  been  recognized  from 
the  beginnin,'^  fo  select  some  and  omit  other  possible  subjects  of  taxation,  to 
select  one  calling  and  omit  another,  to  tax  one  class  of  prop<'rty  and  to  forbear 
to  tax  another.  For  examples  of  such  taxation,  see  cases  in  the  margin. 
deci(l<'(l    in   this  ('(inrl,  iij)hol(liiig  Ww  power. 

Many  instances  might  be  given  where  tliis  court  has  sustained  the  right  of 
a  State  to  select  subjects  of  taxation,  although  as  to  them  the  Fourteenth 
.Amendment  imposes  a  limitation  upon  State  legislatures,  requiring  that  r.o 
p«>rHon  shfill  !»■  dinicd  tlic  ('(iiial  protection  of  the  laws.  See  some  of  them 
notcfi   in   the  margin. 

In  Bell's  fJap  R.  R.  Co.  r.  IVnnsylvania.  134  U.  S.  232,  dealing  with  the 
Foiirteentli  Amendment,  which  in  this  respect  imposes  limitations  only  o« 
State  authority,  this  court  said: 


Nature  of  Federal  Corporation  Tax  Exactment.     11 

"  The  provision  in  the  Fourteenth  Amendment  that  no  State  shall  deny  to 
any  person  within  its  jurisdiction  the  equal  protection  of  the  laws,  was  not 
intended  to  prevent  a  State  from  adjusting  its  system  of  taxation  in  all 
proper  and  reasonable  ways.  It  may,  if  it  chooses,  exempt  certain  classes  of 
property  from  any  taxation  at  all,  such  as  churches,  libraries,  and  the  prop 
erty  of  charitable  institutions.  It  may  impose  different  specific  taxes  upon 
different  trades  and  professions,  and  may  vary  the  rates  of  excise  upon  various 
products;  it  may  tax  real  estate  and  personal  property  only,  and  not  tax 
securities  for  payment  of  money;  it  may  allow  deductions  for  indebtedness, 
or  not  allow  them.  All  such  regulations,  and  those  of  like  character,  so  long 
as  they  proceed  within  reasonable  limits  and  general  usage,  are  within  the 
discretion  of  the  State  legislature,  or  the  people  of  the  State  in  framing  their 
constitution." 

It  is  insisted  in  some  of  the  briefs  assailing  the  validity  of  this  tax  that 
these  cases  have  been  modified  by  Southern  R.  R.  Co.  v.  Greene,  216  U.  S.  400. 
In  that  case  a  corporation  organized  in  a  State,  other  than  Alabama,  came 
into  that  State  in  compliance  with  its  laws,  paid  the  license  tax  and  property 
tax  imposed  upon  other  corporations  doing  business  in  the  State,  and  acquired 
under  direct  sanction  of  the  laws  of  the  State  a  large  amount  of  property 
therein  and  when  it  was  attempted  to  subject  it  to  a  further  tax  on  the  ground 
that  it  was  for  the  privilege  of  doing  business  as  a  foreign  corporation,  when 
the  same  tax  was  not  imposed  upon  State  corporations  doing  precisely  the 
same  business,  in  the  same  way,  it  was  held  that  the  attempted  taxation  was 
merely  arbitrary  classification,  and  void  under  the  Fourteenth  Amendment. 
In  the  case  the  foreign  corporation  was  doing  business  under  the  sanction  of 
the  State  laws  no  less  than  the  local  corporation;  it  had  acquired  its  property 
under  sanction  of  those  laws;  it  had  paid  all  direct  and  indirect  taxes  levied 
against  it,  and  there  was  no  practical  distinction  between  it  and  a  State 
corporation  doing  the  same  business  in  the  same  way. 

Sec.  7.  The  Fact  That  the  Federal  Corporation  Tax  Ope- 
rates Upon  Public  Service  Companies  Does  Not  Affect  the 
Validity  of  the  Act.  —  The  business  of  public  service  corpora- 
tions is  not  intrinsically  an  operation  of  the  State  which  created 
the  company.  Even  were  it  so,  it  has  been  held  that  the  United 
States  may  tax  a  business  conducted  either  for  or  by  the  State 
itself.  In  this  connection  attention  is  called  to  the  remarks  of  thij 
Supreme  Court  in  South  Carolina  v.  United  States,  199  U.  S. 
437.  In  that  case,  Justice  Brewer,  referring  to  the  limitations 
upon  the  United  States  and  States  implied  in  the  Constitution, 
spoke  as  follows : 

Among  those  matters  which  are  implied,  though  not  expressed,  is  that  the 
nation  may  not,  in  the  exercise  of  its  powers,  prevent  a  State  from  discharginer 
the  ordinary  functions  of  government,  just  as  it  follows  from  the  second 
clause  of  Article  VI.  of  the  Constitution,  that  no  State  can  interfere  with  the 


12  Federal  Corporation  Tax  Law. 

free  and  unembarrassed  exercise  by  the  national  government  of  all  the  powers 
•onf erred  upon  it.     Pages  451,  452. 

And  concerning  the  extent  to  which  the  States  may  go  into 
business  if  they  see  fit  and  the  consequent  restriction  of  the  taxing 
power  of  the  United  States,  if  business  done  by  a  State  should  be 
held  free  from  federal  taxation,  it  was  said : 

The  right  of  South  Carolina  to  control  the  sale  of  liquor  by  the  dispensary 
system  has  been  sustained.  Vance  v.  W.  A.  Vandercook  Co.,  No.  1,  170  U.  S. 
438.  The  profits  from  the  business  in  the  year  1901,  as  appears  from  the 
findings  of  fact,  were  over  half  a  million  dollars.  Mingling  the  thought  of 
profit  witli  the  necessity  of  regulation  may  induce  the  State  to  take  posses- 
sion, in  like  manner,  of  tobacco,  oleomargarine,  and  all  other  objects  of 
internal  revenue  tax.  If  one  State  finds  it  thus  profitable  other  States  may 
follow,  and  the  whole  body  of  internal  revenue  tax  be  thus  stricken  down. 

More  than  this,  there  is  a  large  and  growing  movement  in  the  coimtry  in 
favor  of  the  acquisition  and  management  by  the  public  of  what  are  termed 
public  utilities,  including  not  merely  therein  the  supply  of  gas  and  water,  but 
also  the  entire  railroad  system.  Would  the  State  by  taking  into  possession 
these  public  utilities  lose  its  republican  form  of  government? 

We  may  go  even  a  step  further.  There  are  some  insisting  that  the  State 
shall  become  the  owner  of  all  property  and  the  manager  of  all  business.  Of 
course  this  is  an  extreme  view,  but  its  advocates  are  earnestly  contending  that 
thereby  the  best  interests  of  all  citizens  will  be  subserved.  If  this  change 
should  be  made  in  any  State,  how  much  would  that  State  contribute  to  the 
revenue  of  the  nation  ?  If  this  extreme  action  is  not  to  be  counted  among  the 
probabilities,  consider  the  result  of  one  much  less  so.  Suppose  a  State  as- 
sumes under  its  police  power  the  control  of  all  those  ninttors  subject  to  the 
internal  revenue  tax  and  also  engages  in  the  business  of  importing  all  foreign 
goods.  The  same  argument  which  would  exempt  the  sale  by  a  State  of  liquor, 
tobacco,  etc.,  from  a  license  tax  would  exempt  the  importation  of  merchandise 
by  a  State  from  import  duty.  While  the  State  might  not  prohibit  importa 
tions,  as  it  can  the  sale  of  liquor,  by  private  individuals,  yet  paying  no  import 
duty  it  could  undersell  all  individuals  and  so  monopolize  the  importation  and 
•ale  of  foreign  goods. 

01)viously  if  the  powi-r  of  the  State  is  carried  to  the  extent  suggested,  and 
with  it  is  relief  from  all  federal  taxation,  the  national  government  would 
be  largely  crippled  in  its  revenues.  Indeed,  if  all  the  States  should  concur 
in  exercising  their  powers  to  the  full  extent,  it  would  be  almost  impossible 
ff)r  the  nation  to  cnlloct  any  revenues.  In  other  words,  in  this  indirect  way 
it  woulii  be  within  the  competency  of  the  States  to  jiraetically  destroy  the 
efficiency  of  the  national  government.  If  it  be  said  that  the  States  can  be 
trust^'d  not  to  resort  to  any  such  extreme  measures,  because  of  the  resulting 
inl'crferencc  with  the  ofTicienry  of  the  national  government,  we  may  turn  to 
thf!  ojiiriioii  of  .Mr.  ('hief  .riistice  Marstiall,  in  M'CiilIo^li  r.  Maryland,  supra 
(p.  4.31  ),  for  a  complete  answer: 

"  But  is  this  a  case  of  confidence?     Would  the  people  of  any  one  State  trust 


Nature  of  Fedeieal  Corporation  Tax  Enactment.      13 

thoee  of  another  with  a  power  to  control  the  most  insignificant  operations  of 
their  State  government?  We  know  they  would  not.  Why,  then,  should  we 
suppose  that  the  people  of  any  one  State  should  be  willing  to  trust  those  of 
another  with  the  power  to  control  the  operations  of  a  government  to  which 
they  have  confided  their  most  important  and  most  valuable  interests?  In  the 
legislature  of  the  Union  alone  are  all  represented.  Tlie  legislature  of  the 
Union  alone,  therefore,  can  be  trusted  by  the  people  with  the  power  of  con- 
trolling measures  which  concern  all,  in  the  confidence  that  it  will  not  be 
abused." 

In  other  words,  we  are  to  find  in  the  Constitution  itself  the  full  protection 
*o  the  nation,  and  not  to  rest  its  sufficiency  in  either  the  generosity  or  the 
neglect  of  any  State. 

There  is  something  of  a  conflict  between  the  full  power  of  the  nation  in 
respect  to  taxation  and  the  exemption  of  the  State  from  federal  taxation  in 
respect  to  its  property  and  a  discharge  of  all  its  functions.  Where  and  how 
shall  the  line  between  them  be  drawn?  We  have  seen  that  the  full  power  of 
•ollecting  license  taxes  ia  in  the  terms  granted  to  the  national  government 
with  only  the  limitations  of  uniformity  and  the  public  benefit.  The  exemption 
of  the  State's  property  and  its  functions  from  federal  taxation  is  implied 
from  the  dual  character  of  our  federal  system  and  the  necessity  of  preserving 
the  State  in  all  its  efficiency.  In  order  to  determine  to  what  extent  that  im- 
plication will  go  we  must  turn  to  the  condition  of  things  at  the  time  the  Con- 
stitution was  framed.  What,  in  the  light  of  that  condition,  did  the  framers 
of  the  Constitution  intend  should  be  exempt.  Certain  is  it  that  modern  notions 
as  to  the  extent  to  which  the  functions  of  a  State  may  be  carried  had  then  no 
hold.  Whatever  Utopian  theories  may  have  been  presented  by  any  writers 
were  regarded  as  mere  creations  of  fancy,  and  had  no  practical  recognition. 
It  is  true  that  monopolies  in  respect  to  certain  commodities  were  known  to 
have  been  granted  by  absolute  monarchs,  but  they  were  not  regarded  as  con- 
sistent with  Anglo-Saxon  ideas  of  government.  The  opposition  to  the  Con- 
stitution came  not  from  any  apprehension  of  danger  from  the  extent  of  power 
reserved  to  the  States,  but,  on  the  other  hand,  entirely  through  fear  of  what 
might  result  from  the  exercise  of  the  powers  granted  to  the  central  govern- 
ment. While  many  believed  that  the  liberty  of  the  people  depended  on  the 
preservation  of  the  rights  of  the  States,  they  had  no  thought  that  those 
States  would  extend  their  functions  beyond  their  then  recognized  scope,  or  so 
as  to  imperil  the  life  of  the  nation. 

Looking,  therefore,  at  the  Constitution   in  the  light  of  the  conditions  sur- 
rounding at  the  time  of  its  adoption,  it  is  obvious  that  the  framers  in  grant 
ing  full  power  over  license  taxes  to  the  national  government  meant  that  the 
power  should  be  complete,  and  never  thought  that  the   States  by  extending 
their  functions  could  practically  destroy  it.     Pages  454-457. 

The  United  States  Supreme  Court,  in  Flint  r.  Stone  Traeey  &: 
Co.  (220  TJ.  S.  107),  on  this  subject,  spoke  as  follows: 

We  come  to  the  question,  "Are  so-called  public  service  corporations,  such  as 
the  Coney  Island   &   Brooklyn   Railroad    Co..    in  case  No.   40!>.  and   th(>    Int^^'- 
borough   Rapid   Transit  Co.,   No.   442,   exempted   from   the  operation   of   tliis 


14  Federal  Corporation  Tax  Law. 

statute  V"  In  the  case  of  South  Carolina  v.  United  States,  199  U.  S.  437,  the 
court  held  that  when  a  State,  acting  within  its  lawful  authority,  undertook 
to  carry  on  the  liquor  business  it  did  not  withdraw  the  agencies  of  the  State 
carrying  on  the  traffic  from  the  operation  of  the  internal  revenue  laws  of  the 
United  States.  If  a  State  may  not  thus  withdraw  from  the  operation  of  a 
federal  taxing  law  a  subject-matter  of  such  taxation,  it  is  difficult  to  see  how 
the  incorporation  of  companies  whose  service,  though  of  a  public  nature,  is, 
uevertlioloss.  with  a  view  to  private  profit,  can  have  the  effect  of  denying  the 
federal  right  to  reach  such  properties  and  activities  for  the  purposes  of 
revenue. 

It  is  no  part  of  the  essential  governmental  functions  of  a  State  to  provid'i 
means  of  transportation,  supply  artificial  light,  water,  and  the  like.  These 
objects  are  often  accomplished  through  the  medium  of  private  corporations, 
and  though  the  public  maj'  derive  a  benefit  from  such  operations,  the  com- 
panies carrying  on  such  enterprises  are  nevertheless  private  companies,  whose 
business  is  prosecuted  for  private  emolument  and  advantage.  For  the  pur 
pose  of  taxation  they  stand  upon  the  same  footing  as  other  private  corpora 
tions  upon  which  special  franchises  have  been  conferred. 

The  true  distinction  is  between  the  attempted  taxation  of  those  operation.^ 
of  the  State  essential  to  the  execution  of  its  governmental  functions,  and 
which  the  State  can  only  do  itself,  and  those  activities  which  are  of  a  private 
character.  The  former  the  United  States  may  not  interfere  with  by  taxing 
the  agencies  of  the  State  in  carrj'ing  out  its  purposes ;  the  latter,  although 
regulated  by  the  State  and  exercising  delegated  authority,  such  as  the  right 
of  eminent  domain,  are  not  removed  from  the  field  of  legitimate  federal 
taxation. 

Applying  this  principle,  we  are  of  opinion  that  the  so  called  public  service 
corporations  represented  in  the  casca  at  bar  are  not  exempt  from  the  tax  in 
question.     Itailroad  Co.  p.  Penniston,   18  Wall.  5,  33. 

Sec.  8.  The  Federal  Corporation  Tax  Is  Not  Imposed  Upon 
State  or  Municipal  Bonds  or  Upon  the  Income  of  Such  Bonds 
Forming  Part  of  the  Business  Assets  of  the  Company  Whose 
Business  Is  Taxed. —  It  is  conceded  of  course  tliat  the  bonds  of  a 
State  or  of  a  iminieipality  of  a  State,  or  the  income  derived  there- 
ffoiii.  ciiiinnt  he  irKidc  the  f^nhjert  of  a  federal  tax.  Pollock  v. 
Fanners  Loan  &  Trust  Co.,  157  U.  S.  429,  583,  580. 

'I  hi'  rc'i^fiii  'if  this  is  of  ('(mrsc  that  the  power  to  issue  such  is 
an  esscnliiil  cleiucut  of  fh(>  aovereiij^nty  of  the  State  and  eanuot 
he  iiiipaiicd  hy  federal  h'i^islat ion.  However,  this  j)rincip]e  in 
no  wise  alTects  the  validity  of  the  Federal  iiiconic  Tax  for  the 
reasriu  that  the  same  is  not  imposed  on  the  said  i>ouds  or  on  the 
income  of  such  bonds,  but  is  imposed  on  the  business  of  the  com- 
pany whieh  holds  the  bonds  sis  part  of  its  business  assets  and  tlic 
income  from   such    IkjihIh,   as   w(dl   as   from   the  c/mipnny's  other 


Natuuk  of  FiiDEOiAi.  CouroKATioN   Tax  Enactaiknt.      16 

business,  assets  and  activities,  is  used  only  as  a  measure  of  tlui 
amount  of  the  tax  on  the  business. 

On  this  subject  the  United  States  Supreme  Court  in  Flint  v. 
Stone  Tracey  Co.  (220  U.  S.  107),  spoke  as  follows: 

It  is  further  contended  that  some  of  the  corporations,  notably  insurance 
companies,  have  large  investments  in  municipal  bonds  and  other  nontaxable 
securities,  and  in  real  estate  and  personal  property  not  used  in  the  business: 
that  therefore  the  selection  of  the  measure  of  the  income  from  all  sources  in 
void,  because  it  reaches  property  which  is  not  subject  of  taxation,  upon  the 
authority  of  the  Pollock  case,  supra.  But  this  argument  confuses  the  measure 
of  the  tax  upon  the  privilege  with  direct  taxation  of  the  estate  or  thing  taxed. 
In  the  Pollock  case,  as  we  have  seen,  the  tax  was  held  unconstitutional  because 
it  was  in  effect  a  direct  tax  on  the  property  solely  because  of  its  ownership. 

Nor  does  the  adoption  of  this  measure  of  the  amount  of  the  tax  do  violence 
to  the  rule  laid  down  in  Galveston,  Harrisburg  &  San  Antonio  Ry.  Co.  v.  Texas, 
210  U.  S.  217,  nor  the  Western  Union  Tel.  Co.  ;;.  Kansas,  216  U.  S.  1.  In  the 
Galveston  case  it  was  held  that  a  tax  imposed  by  the  State  of  Texas  equal  to 
one  per  cent,  upon  the  gross  receipts  "  from  every  source  whatever,"  of  lines 
of  railroad  lying  wholly  within  the  State,  was  invalid  as  an  attempt  to  tax 
gross  receipts  derived  from  the  carriage  of  passengers  and  freight  in  inter- 
state commerce,  which  in  some  instances  was  an  attempt  to  burden  commerce 
among  the  States,  and  the  fact  that  it  was  declared  to  be  "equal  to"  one 
per  cent,  made  no  difFerence,  as  it  was  merely  an  effort  to  reach  gross  receipts 
by  a  tax  not  even  disguised  as  an  occupation  tax,  and  in  nowise  helped  by  the 
words  "  equal  to."  In  other  words,  the  tax  was  held  void,  as  its  substance 
and  manifest  intent  was  to  tax  interstate  commerce  as  such. 

In  the  Western  Union  Telegraph  cases  the  State  undertook  to  levy  a  graded 
charter  fee  upon  the  entire  capital  stock  of  $100,000,000  of  the  Western  Union 
Telegraph  Company,  a  foreign  corporation,  ami  engaged  in  commerce  among 
the  States,  as  a  condition  of  doing  local  business  within  the  State  of  Kansas. 
This  court  held,  looking  through  forms  avA  reaching  the  substance  of  the 
thing,  that  the  tax  thus  imposed  was  in  reality  a  tax  upon  the  right  to  do 
interstate  commerce  within  the  State  and  an  undertaking  to  tax  property 
beyond  the  limits  of  the  State;  that  whatever  the  declared  purpose,  when 
reasonably  interpreted,  the  necessary  operation  and  eflFect  of  the  act  in  ques- 
tion was  to  burden  interstate  commerce  and  to  tax  property  beyond  the 
jurisdiction  of  the  State,  and  it  was  therefore  invalid. 

There  is  nothing  in  these  cases  contrary,  as  we  shall  have  occasion  to  see, 
to  the  former  rulings  of  this  court  which  hold  that  where  a  tax  is  lawfully 
imposed  upon  the  exercise  of  privileges  within  the  taxing  power  of  the  State 
or  nation,  the  measure  of  such  tax  may  \yc  the  income  from  the  property  of 
the  corporation,  although  a  part  of  such  income  is  derived  from  property  in 
itself  nontaxable.  The  distinction  lies  between  the  attempt  to  tax  the  prop- 
erty as  such  and  to  measure  a  legitimate  tax  upon  the  privileges  involved  in 
the  use  of  such  property. 


16  Federal  Corporation  Tax  Law. 

Sec.  9.  As  an  Excise  the  Tax  Is  Uniform  Under  Clause  1 
of  Section  8  of  Article  1  of  the  United  States  Constitution. — 

The  federal  corporation  tax  complies  with  the  constitutional  rule 
as  to  uniformity  (under  clause  1  of  section  8  of  article  1  of  the 
United  States  Constitution)  even  though  it  is  laid  upon  other 
kinds  of  business  than  insurance  only,  provided  that  such  business 
is  conducted  by  a  corporation  or  joint  stock  company  having 
shares  of  stock.  The  only  uniformity  called  for  by  the  clause  of 
the  Constitution  here  referred  to  is  geographical  uniformity,  and 
when  this  is  conceded,  the  claim  that  the  tax  is  uniform  is  likewise 
conceded. 

Upon  this  subject  the  United  States  Supreme  Court  in  Flint  •. 
Stone  Tracey  Co.  (220  U.  S.  107),  spoke  as  follows: 

The  applicable  provisions  of  the  Constitution  of  the  United  States  in  thii 
connection  are  found  in  article  1,  section  8,  clause  1;  in  article  1,  section  2, 
clause  3;  and  article  1,  section  9,  clause  4.     They  are  respectively: 

"  The  Congress  shall  have  power  to  lay  and  collect  taxes,  duties,  imposts,  and 
excises,  to  pay  the  debts  and  provide  for  the  common  defense  and  general 
welfare  of  the  United  States;  but  all  duties,  imposts,  and  excises  shall  be 
uniform  throughout  the  United  States. 

"  Representatives  and  direct  taxes  shall  be  apportioned  among  the  several 
States  which  may  be  included  within  this  Union,  according  to  their  respective 
numbers. 

"  No  capitation  or  other  direct  tax  shall  be  laid,  unless  in  proportion  to  the 
census  or  enumeration  hereinbefore  directed  to  be  taken." 

It  was  under  the  latter  requiroment  as  to  apportionment  of  direct  taxes 
according  to  population  that  this  court  in  the  Pollock  case  held  the  statute 
of  1894  to  be  unconstitutional.  Upon  the  rehearing  of  the  case  Mr.  Chief 
Justice  Fuller,  who  spoke  for  the  court  summarizing  the  effect  of  the  decision, 
said: 

"  We  have  considered  the  act  only  in  respect  of  the  tax  on  income  derived  from 
real  estate,  and  from  invested  personal  property,  and  have  not  commented 
on  so  much  of  it  as  bears  on  gains  or  profits  from  business,  privileges,  or  em- 
ployments, in  view  of  the  instances  in  which  taxation  on  business,  privileges, 
or  employments  lias  assumed  the  guise  of  an  excise  tax  and  been  sustained  as 
such.     l.W  U.  S.  635." 

And  as  to  excise  taxes,  the  chief  justice  said: 

"  We  do  not  mean  to  say  thai  an  act  laying  by  apportionment  a  direct  tax 
on  all  real  estate  or  personal  property,  or  tlie  income  thereof  might  not  also  lay 
excise  taxes  on  business,  privilogos,  employments,  and  vocations.     Page  (137." 

Tlie  Pollock  case  was  before  this  court  in  Knowlton  r.  Moore,  173  U.  S.  41. 
In  that  case  this  court  HiiHl.-iiiied  an  excise  tax  upon  tlie  transmission  of  prop- 
<'rty  by  iniieritance.  It  was  contended  there  as  liere,  that  the  case  was  ruled 
by  the  Pollock  case,  and  of  that  case  this  court,  speaking  by  the  present  chief 
iiiftic*',    said: 


A'atube  of  Fedebal  CoKi'oRATioN  Tax  Enactment.     17 

'•  The  issue  presented  in  the  Pollock  case  was  whether  an  income  tax  was 
direct  within  the  meaning  of  the  Constitution.  The  contentions  which  the 
case  involved  were  thus  presented.  On  the  one  hand  it  was  argued  that  only 
capitation  taxes  and  taxes  on  land  as  such  were  direct,  within  the  meaning 
of  the  Constitution,  considered  as  a  matter  of  first  impression,  and  that  pre 
vious  adjudications  had  construed  the  Constitution  as  having  that  import.  On 
the  other  hand,  it  was  asserted  that,  in  principle,  direct  taxes,  in  the  consti- 
tutional sense,  embraced  not  only  taxes  on  land  and  capitation  taxes  but  all 
burdens  laid  on  real  or  personal  property  because  of  its  ownership,  which 
were  equivalent  to  a  direct  tax  on  such  property,  and  it  was  affirmed  that  the 
previous  adjudications  of  this  court  had  settled  nothing  to  the  contrary. 

"  *  *  *  Undoubtedly,  in  the  course  of  the  opinion  in  the  Pollock  case 
it  was  said  that  if  a  tax  was  direct  within  the  constitutional  sense  the  mere 
erroneous  qualification  of  it  as  an  excise  or  duty  would  not  take  it  out  of  the 
constitutional  requirement  as  to  apportionment.  But  this  language  related 
to  the  subject  matter  under  consideration,  and  was  but  a  statement  that  a 
tax  which  was  in  itself  direct,  because  imposed  upon  property  solely  because 
of  its  ownership,  could  not  be  changed  by  affixing  to  it  the  qualifications  of 
excise  or  duty.  Here  we  are  asked  to  decide  that  a  tax  is  a  direct  tax  on 
property  which  has  at  all  times  been  considered  as  the  antithesis  of  such  a 
tax ;  that  is,  that  it  has  ever  been  treated  as  a  duty  or  excise,  because  of  the 
particular  occasion  which  gives  rise  to  its  levy. 

"  *  *  *  Considering  that  the  constitutional  rule  of  apportionment  had 
its  origin  in  the  purpose  to  prevent  taxes  on  persons  solely  because  of  their 
general  ovmership  of  property  from  being  levied  by  any  other  rule  than  that 
of  apportionment,  two  things  were  decided  by  the  court:  First,  that  no  sound 
distinction  existed  between  a  tax  levied  on  a  person  solely  because  of  his 
general  ownership  of  real  property,  and  the  same  tax  imposed  solely  because 
of  his  general  ownership  of  personal  property.  Secondly,  that  the  tax  on  the 
income  derived  from  such  property,  real  or  personal,  was  the  legal  equivalent 
of  a  direct  tax  on  the  property  from  which  said  income  was  derived,  and 
hence  must  be  apportioned.  These  conclusions,  however,  lend  no  support  to 
the  essential  equivalents  of  a  tax  on  property  generally,  real  or  personal,  solely 
because  of  its  ownership,  must  be  converted  into  direct  taxes,  because  it  is 
conceived  that  it  would  be  demonstrated  by  a  close  analysis  that  they  could 
not  be  shifted  from  the  person  upon  whom  they  first  fall." 

The  same  view  was  taken  of  the  Pollock  case  in  the  subsequent  case  of 
Spreckels  Sugar  Refining  Co.  v.  McClain,  \92  U.  S.  397. 

The  act  now  under  consideration  does  not  impose  direct  taxation  upon  prop- 
erty solely  because  of  its  ownership,  but  the  tax  is  within  the  class  which 
Congress  is  authorized  to  lay  and  collect  under  article  1,  section  8,  clause  1, 
of  the  Constitution,  and  described  generally  as  taxes,  duties,  imposts,  and 
excises,  upon  which  the  limitation  is  that  they  shall  be  uniform  throughout 
the  United  States. 

Within  the  category  of  indirect  taxation,  as  we  shall  have  further  occasion 
to  show,  is  embraced  a  tax  upon  business  done  in  a  corporate  capacity,  which 
is  the  subject-matter  of  the  tax  imposed  in  the  act  under  consideration.  The 
Pollock  case  construed  the  tax  there  levied  as  direct,  because  it  was  impo.«»ed 
upon  property  simply  because  of  its  ownership.  In  the  present  case  the  tax 
Fed.  Corp.  Tax  —  2 


18  FliDEKAL    Coill'DKATlOX    TaX    LaW. 

is  not  payable  unless  there  be  a  carrying  on  or  doing  of  business  in  the  desig- 
nated capacity,  and  this  is  made  the  occasion  for  the  tax,  measured  by  the 
standard  prescribed.  The  difl'erence  between  the  acts  is  not  merely  nominal, 
but  rests  upon  substantial  differences  between  the  mere  ownership  of  property 
and  the  actual  doing  of  business  in  a  certain  waj-.  It  is  unnecessary  to  enter 
upon  an  extended  consideration  of  the  technical  meaning  of  the  term  "  excise." 
It  has  been  the  subject  matter  of  considerable  discussion  —  the  terms  duties, 
imposts,  and  excises  are  generally  treated  as  embracing  the  indirect  forma 
of  taxation  contemplated  by  the  Constitution.  As  Mr.  Chief  Justice  Fuller 
said  in  the  Pollock  case,  supra: 

"Although  there  have  been  from  time  to  time  intimations  that  there  might 
be  some  tax  which  was  not  a  direct  tax  nor  included  under  the  words  '  duties, 
imposts,  and  excises,'  such  a  tax  for  more  than  one  hundred  years  of  national 
existence  has  as  yet  remained  undiscovered,  notwithstanding  the  stress  of  par 
ticular  circumstances  has  invited  thorough  investigation  into  sources  of 
revenue." 

And  in  tiie  same  connection  the  chief  justice,  delivering  the  opinion  of  the 
court  in  Thomas  r.  United  States,  192  U.  S.  362,  in  speaking  of  the  words 
duties,  imposts,  and  excises,  said: 

"  We  think  that  they  are  used  comprehensively  to  cover  customs  and  excise 
duties  imposed  on  importation,  consumption,  manufacture,  and  sale  of  certain 
commodities,  privileges,  particular  business  transactions,  vocations,  occupa- 
tions, and  the  like." 

Duties  and  imposts  are  terms  commonly  applied  to  levies  made  by  govern- 
ments on  the  importation  or  exportation  of  commodities.  Excises  are  "  taxes 
laid  upon  the  manufacture,  sale,  or  consumption  of  commodities,  within  the 
country  upon  licenses  to  pursue  certain  occupations,  and  iipon  corporate 
privileges."     Cooley  Cons.  Lim.   (7th  ed.)   680. 

The  tax  under  consideration,  as  we  have  construed  the  statute,  may  be  de 
scribed  as  an  excise  tax  upon  the  particular  privilege  of  doing  business,  in  a 
corporate  capacity;  t.  e.,  with  the  advantages  which  arise  from  corporate  or 
quasi-corporate  organization;  or,  when  applied  to  insurance  companies,  for 
doing  the  business  of  such  companies.  As  was  said  in  the  Thomas  case,  192 
U.  S.,  supra,  the  requirement  to  pay  such  taxes  involves  the  exercise  of  privi- 
leges, and  the  element  of  absolute  and  unavoidable  demand  is  lacking.  If 
business  is  not  done  in  the  manner  described  in  the  statute  no  tax  is  payable. 
If  w<>  are  correct  in  hoMing  tliat  tliis  is  an  excise  tax,  there  is  notiiing  in 
till"  ('(institii(i<iii  requiring  such  taxes  to  l)e  apportioned  according  to  popula 
tion.  Pacific  Ins.  Co.  V.  Soule.  7  Wall.  4.3.3;  Springer  r.  United  States,  102  U. 
S.  r>HC-  Spreckels  Sugar  rt<'nning  Co.,  192  U.  S.  .397. 

Sec.  10.  The  Federal  Corporation  Tax  Does  Not  Lack  Uni- 
formity Because  It  Contains  Certain  Rxemptions  as  to  the 
Kind  of  Corporations  Which    Are   Subject   to  the  Tax.  —  The 

yinints  licrc  rclVrrcd  to  ni:i\'  he  hricllv  (■miincrntcd  ms  follows: 

'I'lic  tiiN  iiiil\-  ;i]ij)lics  to  iiicdtiics  over  :u\i\  iiliov'c  lixc  tlioiisand 
dollars.  Oil  lliis  ■-nliici't  tlu-  I'tiilcil  Stnfcs  Siiprnnc  (^onrt  in 
Flint  r.  Si., II.'  'Vv.u-cy  &  Co.  (220  11.  S.  107),  spoko  as  f.)llo\vs: 


Nature  of   Fkdkkai.   (Jokpokatioa    Tax  Enactment.      19 

It  is  again  objected  that  incomes  under  $5,000  are  exempted  from  the  tax. 
It  is  only  necessary  in  this  connection  to  refer  to  Knowlton  v.  Moore,  178  U. 
a.,  supra,  in  which  a  tax  upon  inheritances  in  excess  of  $10,000  was  sustained. 
In  Magoun  V.  Illinois  Trust  &  Savings  iJank,  170  U.  S.  283,  293,  a  graded  in-  , 
heritance  tax  was  sustained. 

Neither  does  it  lack  uniformity  because  it  exempts  from  the 
operation  of  the  tax,  labor,  agricultural  or  horticultural  organiza- 
tions, fraternal  beneficial  societies,  orders  or  associations,  ojxirat- 
iug  under  the  lodge  system,  and  providing  for  the  payment  of  life, 
sick,  accident  or  other  benefits,  to  the  members  of  such  societies, 
orders  and  associations  and  dependents  upon  such  members, 
domestic  building  and  loan  associations  organized  explicitly  for 
the  mutual  benefit  of  their  members,  together  with  the  religious, 
charitable  or  educational  organizations. 

On  this  subject  the  United  States  Supreme  Court  in  Flint  v. 
Stone  Tracey  &  Co.  (220  U.  S.  107),  spoke  as  follows: 

As  to  the  objections  that  certain  organizations,  labor,  agricultural,  and 
horticultural,  fraternal  and  benevolent  societies,  loan  and  building  associa 
tions,  and  those  for  religious,  charitable,  or  educational  purposes,  are  ex- 
cepted from  the  operation  of  the  law,  we  find  nothing  in  them  to  invalidate 
the  tax.  As  we  have  had  frequent  occasion  to  say,  the  decisions  of  this  court 
from  an  early  date  to  the  present  time  have  emphasized  the  right  of  Congress 
to  select  the  objects  of  excise  taxation,  and  within  this  power  to  tax  some  and 
leave  others  untaxed  must  be  included  the  right  to  make  exemptions  such  as 
are  found  in  this  act. 

Again,  it  is  urged  that  Congress  exceeded  its  power  in  permitting  a  deduc 
lion  to  be  made  of  interest  payments  only  in  case  of  interest  paid  by  banks 
nnd  trust  companies  on  deposits,  and  interest  actually  paid  within  the  year 
on  its  bonded  or  other  indebtedness  to  an  amount  of  such  Ixinded  and  other 
indebtedness  not  exceeding  the  paid  up  capital  stock  of  the  corporation  or 
company.  This  provision  may  have  been  inserted  with  a  view  to  prevent  cor- 
porations from  issuing  a  large  amount  of  bonds  in  excess  of  the  paid-up 
capital  stock,  and  thereby  distributing  profits  so  as  to  avoid  the  tax.  In  any 
f-vent.  we  see  no  rea'^on  why  this  method  of  ascertaining  the  deductions  al 
lowed  should  invalidate  the  act.  Such  details  are  not  wholly  arbitrary,  and 
were  deemed  essential  to  practical  operation.  Courts  cannot  substitute  their 
judgment  for  that  of  the  legislature.  Tn  such  matters  a  wide  range  of  dis- 
cretion is  allowed. 

The  argument  that  different  corporations  are  so  difTerently  circumstanced 
in  different  States,  and  the  operation  of  the  law  so  unequal  as  to  destroy  it. 
is  so  fully  met  in  the  opinion  in  Knowlton  r.  Moore,  178  U.  S.,  supra,  thnt 
it  is  only  necessary  to  make  reference  thereto.  For  this  purpose  fh"  1:"v 
operates  uniformly,  ceosraphicallv  considored.  throufrbont  the  T^nifod  Pf^t'^'s, 
and  in  the  same  way  wherever  the  subject-matter  is  found.  A  liquor  tax  is 
'1'^t  rendered  unlawful  as  a  revenue  measure  because  it  may  yield  nothinir  i" 

L 


20  Federal  Corporation  Tax  Law, 

those  States  which  have  promoted  the  liquor  traffic.  No  more  is  the  present 
law  unconstitutional  because  of  inequality  of  operation  owing  to  different 
local  conditions. 

Nor  is  the  special  objection  tenable,  made  in  some  of  the  cases,  that  the 
corporations  act  as  trustees,  guardians,  etc.,  under  the  authority  of  the  laws 
or  courts  of  the  State.  Such  trustees  are  not  the  agents  of  the  State  govern- 
ment in  a  sense  which  exempts  them  from  taxation  because  executing  the 
necessary  governmental  powers  of  the  Stat*".  The  trustees  receive  their  com 
pensation  from  the  interests  served,  and  not  from  the  public  revenues  of  the- 
State. 

Sec.  11.  The  Federal  Corporation  Tax  Does  Not  Subject 
Corporations  to  Unreasonable  Search  or  Seizures,  or  Require 
Officers  Thereof  to  Incriminate  Themselves.  —  The  act  con- 
tains no  authorization  which  could  be  made  the  basis  for  a  claim 
that  it  subjects  the  companies  subject  to  the  tax  to  unreasonable 
search  or  seizure,  or  makes  it  imperative  upon  officers  thereof  to 
incriminate  themselves. 

The  United  States  Supreme  Court,  in  Elint  v.  Stone  Tracey  & 
Co,  (220  U.  S.  107),  on  this  subject,  spoke  as  follows: 

It  is  urged  in  a  number  of  cases  that  in  a  certain  feature  of  the  statute* 
there  is  a  violation  of  the  Fourth  Amendment  of  the  Constitution,  protecting 
against  unreasonable  searches  and  seizures.  Tliis  amendment  was  adopted 
to  protect  against  abuses  in  judicial  procedure,  under  the  guise  of  law,  which 
invade  the  privacy  of  persons  in  their  homes,  papers,  and  effects,  and  applies 
to  criminal  prosecutions  and  suits  for  penalties  and  forfeitures  under  the 
revenue  laws.  Boyd  v.  United  States,  IIG  U.  S.  G32.  It  does  not  prevent  the 
issue  of  search  warrants  for  the  seizure  of  gambling  paraphernalia  and  other 
illegal  matter.  Adams  v.  New  York,  192  U.  S.  585.  It  does  not  prevent  the 
issuing  of  process  to  require  attendance  and  testimony  of  witnesses,  the  pro 
duction  of  books  and  papers,  etc.  Interstate  Commerce  Commission  r.  Brim 
son,  154  U.  S.  44V;  Inter.state  Commerce  Commission  V.  Baird,  194  U.  S.  25. 
Certainly  the  amendment  was  not  intended  to  prevent  ordinary  procedure  in 
use  in  many,  perhaps  most,  of  the  States,  of  requiring  tax  returns  to  be  mad?, 
often  under  oatli.  The  objection  in  this  connection  applies  when  the  substance 
of  the  argunif'iit  is  reached,  to  tlx-  sixth  section  of  the  act,  which  provides: 

"Sixth.  Wlicii  flic  assessment  kIkiII  be  ni.ule,  as  provided  in  this  section,  th»- 
returns,   together    with    any    corrections   thereof   which   may   have   been   mado 
bv  the  eonimissidncr.  shall   be   filed    in  the  office  of   the  Commissioner  of   In 
ternal   Revenue  and  shall  constitute  p\iblic  records  and  be  open  to  inspection 

as  such." 

An  iinK'ndrncnt  was  niiidc  .luiir    17.   1910,  which   reads  na  follows: 

"For  el  i^sifving,   imlcxiiiLr,  cxhiliil  inj.',   and    properly  caring  for   the   returns 

of  all  corporations,  reijuircd  by  section  thirty  eight  of  an  act  entitled  'An  Act 

to  provide   revenue,  equalize   duties,   encournge   tlic    industries   of    the   ITnit<«<l 

States,  and  for  other  purposes,'  approved  August  fifth,  nineteen  hundred  and 


Natuke  of  Federal  Corporation  Tax  Enactment.     21 

iiiiip,  including  the  employment  in  the  District  of  Columbia,  of  such  clerical 
and  other  jjer.soiial  services  and  for  rent  of  sucli  quarters  as  may  bo  necessary, 
twenty  five  tliuusaiid  dollars.  Provided,  That  any  and  all  such  returns  shall 
be  open  to  inspection  only  upon  the  order  of  the  President  under  rules  and 
regulations  to  be  prescribed  by  the  Secretary  of  the  Treasury  and  approved  by 
the  President." 

The  contention  is  that  tlie  above  section,  as  originally  framed  and  as  now 
amended,  could  have  no  legitimate  connection  with  the  collection  of  the  tax, 
and  in  substance  amounts  to  no  more  than  an  unlawful  attempt  to  exhibit  the 
private  affairs  of  corporations  to  public  or  private  inspection,  without  any 
Bubstantial  connection  witli  or  legitimate  purpose  to  be  subserved  in  tlie  col- 
kction  of  the  tax  under  the  act  now  under  consideration.  But  we  cannot 
agree  to  this  contention.  The  taxation,  being  as  we  have  held,  within  th'j 
legitimate  powers  of  Congress,  it  is  for  that  body  to  determine  what  means 
are  appropriate  and  adapted  to  the  purposes  of  making  the  law  effectual.  In 
this  connection,  the  often  quoted  declaration  of  Chief  Justice  Marshall,  in 
jMcCulloch  V.  Maryland,  4  Wheat.  316,  421,  is  appropriate: 

"  Let  the  end  be  legitimate,  let  it  be  within  the  scope  of  the  Constitution, 
and  all  means  which  are  appropriate,  and  which  are  plainly  adapted  to  that 
end,  and  which  are  not  prohibited,  but  are  consistent  with  the  letter  and 
spirit  of  the  Constitution,  are  constitutional." 

Congress  may  have  deemed  the  public  inspection  of  such  returns  a  means 
of  more  properly  securing  the  fulness  and  accuracy  thereof.  In  many  of  the 
States  laws  are  to  be  found  making  tax  returns  public  documents  and  open 
to  inspection. 

We  cannot  say  that  this  feature  of  the  law  does  violence  to  the  constitu- 
tional protection  of  the  Fourth  Amendment,  and  this  is  equally  true  of  the 
Fifth  Amendment,  protecting  persons  against  compulsory  self  incriminating 
testimony.  No  question  under  the  latter  amendment  properly  arises  in  these 
cases,  and  when  circumstances  are  presented  whicli  invoke  the  protection  of 
that  amendment  and  raise  questions  involving  rights  thereby  secured  it  will 
be  time  enough  to  decide  them.  And  so  of  the  argument  that  the  penalties 
for  the  nonpayment  of  the  taxes  are  so  high  as  to  violate  the  Constitution. 
No  case  is  presented  involving  that  question,  and,  moreover,  the  penalties  are 
clearly  a  separate  part  of  the  act,  and  whether  collectible  or  not  may  be  de- 
termined in  a  case  involving  an  attempt  to  enforce  them.  Wilcox  v.  Consoli- 
dated Gas  Co.,  212  U.  S.  19,  53. 

Sec.  12.  The  Tax  May  Be  Collected  in  One  Year  Though  It 
Is  Measured  by  the  Net  Income  of  the  Tax  Paying  Company 
During  the  Preceding  Year.  —  The  tax  is  not  laid  upon  but  is 
only  measured  by  the  income.  Any  excise  tax  however  laid  may 
be  levied  after  part  of  the  year  durinc;  which  the  tax  was  operative 
lias  expired.  See  Stockdale  v.  Ins.  Cos.,  20  Wall.  323;  R.  R.  Co. 
V.  Rose,  95  U.  S.  78 ;  Patton  v.  Brady,  184  U.  S.  608 ;  Locke  v. 
New  Orleans,  4  Wall.  172. 


22  i^EDEKAL  Corporation  Tax  Law. 


CHAPTER  II. 

CONSTITUTIONALITY    OF    THE    TAX. 

Sec.  13.  Constitutionality  of  the  Federal  Corporation  Tax. 

—  The  decision  of  the  Supreme  Court  of  the  United  States  in 
what  are  known  as  the  federal  corporation  tax  cases  was  rendered 
by  the  United  States  Supreme  Court  on  the  13th  day  of  March, 
1911.     The  decision  is  entitled: 

Stella  P.  Flint,  as  General  Guardian  of  the  property  of  Samuel  N.  Stone, 
Jr.,  a  minor,  v.  Stone  Tracy  Co.  et  al.,  220  U.  S.  107. 

This  case  together  with  fourteen  cases  advanced  for  hearing 
with  the  case  just  referred  to,  are  all  governed  and  controlled  by 
the  decision  in  Flint  v.  Stone  Tracey  Company  et  al.,  and  were 
argued  and  submitted  at  the  same  time. 

The  decision  of  the  court  with  the  statement  of  facts  upon 
which  the  decision  was  based  is  here  reproduced  in  full : 

Mr.  .Justice  Day  delivered  the  opinion  of  the  court. 

These  cases  involve  the  constitutional  validity  of  section  38  of  the  Act  of 
Congress  approved  August  .'>,  litOi),  known  as  "The  Corporation  Tax"  law. 
(Stat.  liHM),  pp.   112-117.) 

It  is  conU'uded  in  the  first  place  that  tliis  section  of  tlie  act  is  unconstitu- 
tional, because  it  is  a  revenue  measure,  and  originat4'd  in  the  senate  in  viola- 
tion of  section  7  of  article  1  of  the  ('onstitution,  providing  tliat  "  all  bilN 
for  the  raising  of  revenue  shall  originate  in  the  hoiise  of  re]»res<>ntatives,  hut 
the  senate  may  propose  or  concur  with  amendments  as  on  other  hills."  The 
history  of  the  act  is  contained  in  tlie  governnK'iil's  brief,  aiul  is  accepted  as 
correct,  no  objection  being  made  to  its  acciiracy. 

This  statement  shows  that  the  tarifT  liill.  of  which  the  section  under  con- 
frideration  is  a  j)art.  originated  in  the  house  of  rcj)r<<sentatives  and  was  there 
a  general  iiilj  for  the  eoilertioii  (,f  ri-veniie.  .As  origitiiilly  introduced  it  con 
tnined  ii  pl.-m  nf  iiilirrit  iiiice  t:i\;i(ioii.  In  fbe  s<'nate  the  proposed  tax  was 
remf)ved  froin  tli<  bill,  :uid  the  corporation  tax,  in  a  measure,  substituted 
thr-refor.  The  bill  Imviii','  prfiperly  origin.-ited  in  the  house,  we  i)erceive  no 
renson  in  the  cfinst  idit  io(i;il  provision  relied  ujion  why  it  may  not  be  amended 
in  the  "M-nate  in  tlie  manner  which  it  was  in  this  case.     The  amendment  wn.* 


Constitutionality  <)i<   tiik  Tax.  ^'-i 

germane  to  the  subject-matter  of  the  bill  and  not  beyunii  the  power  of  the 
senate  to  propijse.  In  tinis  deciding  we  do  not  wisli  to  Ix'  legarded  a^  iiolding 
that  the  journals  of  the  liouse  and  senate  may  be  examined  to  invalidate  an 
act  which  has  been  passed  and  signed  by  tlu-  presiding  odiccrs  of  th<  house 
iind  senate  and  approved  by  the  President  and  duly  deposited  with  the  State 
department.  Field  v.  (Hark,  143  U.  S.  049;  Ilarwood  v.  Wentworth,  1G2  U.  S. 
r)47;  Twin  City  Bank  v.  Xebeker,   107   l'.  S.   19G. 

In  order  to  have  in  mind  some  of  the  more  salient  features  of  the  statute 
with  a  view  to  its  interpretation,  a  part  of  the  first  paragraph  is  here  set  out, 
as  follows: 

"  Sec.  38.  That  every  corporation,  joint  stock  company  or  association  organ 
ized  for  profit  and  having  a  capital  stock  represented  by  shares,   and  every 
insurance  company  now  or  hereafter  organized  under  the  laws  of  the  United 
States  or  of  any  State  or  Territory  of  the  United  States  or  under  the  acts  of 
Congress  applicable  to  Alaska  or  the  District  of  Columbia,  or  now  or  hereafter 
organized  under  the  laws  of  any  foreign  country  and  engaged  in  business  in 
any  State  or  Territory  of  the  United   States  or  in   Alaska  or  in  the  District 
of  Columbia,  shall  be  subject  to  pay  annually  a  special  excise  tax  with  respect 
to  the  carrying  on  or  doing  business  by  such  corporation,  joint  stock  company 
or  association  or  insurance  company  equivalent  to  one  per  centum   upon  the 
entire  net  income  over  and  above  five  thousand  dollars  received  by  it  from  all 
sources  during  such   year,  exclusive  of  amounts   received   by  it  as  dividends 
upon  stock  of  other  corporations,  joint  stock  companies  or  associations  or  in 
surance  companies  subject  to  the  tax  hereby  imposed ;  or  if  organized  under 
the   laws  of  any  foreign  country,  upon  the  amount  of  net  income  over  and 
above  five  thousand  dollars  received  by  it  from  business  transacted  and  capital 
invested  within  the  United  States  and  its  Territories,  Alaska  and  the  District 
of  Columbia,  during  such  year,  exclusive  of  amounts  so  received  by  it  as  divi 
dends  upon  stock  of  other  corporations,  joint  stock  companies  or  associations 
or  insurance  companies  subject  to  the  tax  hereby  imposed." 

A  reading  of  this  portion  of  the  statute  shows  the  purpose  and  design  of 
Congress  in  its  enactment  and  tiie  subject-matter  of  its  operation.     It   is  at 
once  apparent  that  its  terms  embrace  corporations  and  joint  stock  companies 
or  associations  which  are  organized  for  profit,  and  have  a  capital  stock  repre 
sented  by  shares.     Such  joint  stock  companies,  while  difTering  somewhat  from 
corporations,  have  many  of  their  attributes  and  enjoy  many  of  their  privileges. 
To  these  are  added  insurance  companies,  and  they,  as  corporations,  joint  stock 
companies  or   associations,    must  be  such   as   are   now  or   hereafter  organized 
under  the  laws  of  the  United  States  or  of  any  State  or  Territory  of  the  United 
States,  or  under  the  acts  of  Congress  applicable  to  Alaska  and  the  District  of 
Columbia.     Each  and  all  of  these,  the  statute  declares,  shall  be  subject  to  pay 
annually  a  special  excise  tax  with  resytect  to  the  carrying  on  and  doing  busi 
ness  by  such   corporation,  joint  stock  company  or   association,   or   insurance 
company.     The  tax  is  to  be  equivalent  to  one  per  cent,  of  the  entire  net  income 
over  and  above  ,$5,000  received  by  such  corporation  or  company  frnvi  all  sources 
during  the  v<'ar,  excluding,   however,  amounts  received  by  them   as  dividends 
upon  stock   of  other  corporations,  joint  stock   companies  or  associations,  or 
insurance  companies,  subject  to  the  tax  imposed  by  the  statute.     Similar  com- 
panies organized  under  the  laws  of  any  foreign  country  and  engaged  in  busi- 


24  Fedejial  Corpokatiox  Tax  Law. 

ness  in  anj'  State  or  Territory  of  the  United  States,  or  in  Alaska  or  the  Dis 
trict  of  Columbia,  are  required  to  pay  the  tax  upon  the  net  income  over  and 
above  $5,000  received  by  them  from  business  transacted  and  capital  invested 
williin  the  United  States,  the  Territories,  Alaska,  and  the  District  of  Co- 
lumbia, during  each  year,  with  the  like  exclusion  as  to  amounts  received  by 
them  as  dividends  upon  stock  of  other  corporations,  joint  stock  companies  or 
associations,  or  insurance  coinpani<'s,  subject  to  the  tax  imposed. 

While  the  mere  declaration  contained  in  a  statute  that  it  shall  be  regarded 
as  a  tax  of  a  particular  character  does  not  make  it  such  if  it  is  apparent 
that  it  cannot  be  so  designated  consistently  with  the  meaning  and  effect  of 
the  act,  nevertheless  the  declaration  of  the  lawnuiking  power  is  entitled  to 
much  weight,  and  in  this  statute  the  intention  is  expressly  declared  to  impose 
a  special  excise  tax  with  respect  to  the  carrying  on  or  doing  business  by  such 
corporation,  joint  stock  company  or  association,  or  company.  It  is  therefore 
apparent,  giving  all  the  words  of  the  statute  effect,  that  the  tax  is  imposed 
not  upon  the  franchises  of  the  corporation  irresj)ective  of  their  use  in  business, 
nor  upon  the  property  of  the  corporation,  but  upon  the  doing  of  corporate  or 
insurance  business  and  with  respect  to  the  carrying  on  thereof,  in  a  sum 
equivalent  to  one  per  centum  upon  the  entire  net  income  over  and  above 
$5,000  received  from  all  sources  during  the  year;  tluit  is,  when  imposed  in 
this  manner  it  is  a  tax  upon  the  doing  of  business  with  the  advantages  which 
inhere  in  the  peculiarities  of  corporate  or  joint  stock  organizations  of  the 
character  described.  As  the  latter  organizations  share  many  benefits  of  cor- 
porate organization  it  may  be  described  generally  as  a  tax  upon  the  doing  of 
business  in  a  corporate  capacity.  In  the  case  of  the  insurance  companies  the 
tax  is  imposed  upon  the  transaction  of  such  business  by  companies  organized 
under  the  laws  of  the  United  States  or  any  State  or  Territory,  as  heretoforfl- 

stated. 

This  tax,  it  is  expressly  stated,  is  to  be  equivalent  to  one  per  centum  of  the 
entire  net  income  over  and  above  $5,000  received  from  all  sources  during  the 
year  —  this  is  tlie  measure  of  the  tax  explicitly  adojited  by  the  statute.  The 
income  is  not  limited  to  such  as  is  received  from  property  used  in  tlie  busines:i, 
strictly  speaking,  but  is  expressly  declared  to  be  upon  the  entire  net  income 
above  $5,000  from  all  sources,  excluding  the  amounts  received  as  dividends  on 
stock  in  other  corporations,  joint  stock  con)puni<-s  or  associations,  or  insurance 
companies  also  subject  to  the  tax.  In  other  words,  the  tax  is  imposed  upon 
the  doing  of  Imsiness  of  the  character  described,  ami  tin-  measure  of  the  tax 
is  to  lie  the  income,  with  the  deduction  stated,  received  not  only  from  prop- 
erty u.sed  in  business,  but  from  every  source.  This  view  of  the  measure  of 
the  tax  i-*  Hlrongtiiened  wiien  we  note  that  as  to  organizations  \inder  the  law.s 
of  foreign  countries  the  amount  of  net  income  over  and  above  $5,000  includes 
that  received  from  business  transacted  and  eapital  invested  in  the  United 
RtnteB.   the  Territories.  Alaska,  and    tlie   District  of  Colinnbia. 

It  is  further  strengthened  when  the  subsequent  s«'etions  are  considered  na 
to  deduction'*  in  ascertaining  net  income  and  requiring  returns  from  those 
Hubjert  to  (he  art.  Under  the  second  paragraph  the  net  income  is  to  be  ascer 
tnined  by  certain  deductions  fmin  (lie  trmss  nm.uin(  of  income  received  within 
the  venr  "from  nil  H<mrees:  "  nml  Cu-  return  to  be  rnaih'  to  the  collector  of 
internal  revenue  under  the  third  section  is  required  to  show  the  gross  amount 


CONSTITL'TIONAMTV    OK    TUB    TaX.  25 

of  the  income  received  during  the  year  "  from  iill  sources."  The  evident  pur- 
pose is  to  secure  a  return  ol  the  entire  income,  with  certain  allowances  and 
deductions  which  do  not  suggest  a  restriction  to  income  derived  from  jiroijerty 
actively  engaged  in  the  business,  'ihis  interpretation  of  the  act,  as  resting 
upon  the  doing  of  business,  is  sustained  by  the  reasoning  in  Spreckels  Sugar 
Refining  Co.  r.  McChiin,  1<J2  U.  S.  397,  in  which  a  special  tax  measured  by 
the  gross  receipts  of  the  business  of  refining  oil  and  sugar  was  sustained  as 
an  excise  in  respect  to  the  carrying  on  or  doing  of  such  business. 

Having  thus  interpreted  the  statute  in  conformity,  as  we  believe,  with  the 
intention  uf  Congress  in  passing  it,  we  proceed  to  consider  whether,  as  thus 
construed,  the  statute  is  constitutional. 

It  is  contended  that  it  is  not,  certainly  so  far  as  the  tax  is  measured  bv 
the  income  of  bonds  nontaxable  under  federal  statutes,  and  munieijjal  and 
State  bonds  beyond  the  federal  power  of  taxation.  And  so  of  n-al  and  per- 
sonal estates,  because  as  to  such  estates  the  tax  is  direct,  and  required  to  be 
apportioned  according  to  population  among  the  States.  It  is  insisted  that 
such  must  be  the  holding  unless  this  court  is  prepared  to  reverse  the  income 
tax  cases  decided  under  the  Act  of  1894.  Pollock  i'.  Farmers'  Loan  &  Trust 
Co.,  157  U.  S.  429;  s.  c,  158  U.  S.  601. 

The  applicable  provisions  of  the  Constitution  of  the  United  States  in  this 
connection  are  found  in  article  1,  section  8,  clause  1,  and  in  article  1,  section  2, 
clause  3,  and  article   1,  section  9,  clause  4.     They  are  respectively: 

"  The  Congress  shall  have  power  to  lay  and  collect  taxes,  duties,  imposts 
and  excises,  to  pay  the  debts  and  provide  for  the  common  defense  and  general 
welfare  of  the  United  States;  but  all  duties,  imposts,  and  excises  shall  be 
uniform  throughout  the  United  States. 

"  Representatives  and  direct  taxes  shall  be  apportioned  among  the  several 
States  which  may  be  included  within  this  Union,  according  to  their  respective 
numbers. 

"  No  capitation  or  other  direct  tax  shall  be  laid,  unless  in  proportion  to  the 
census  or  enumeration  hereinbefore  directed  to  be  taken." 

It  was  under  the  latter  requirement  as  to  apportionment  of  direct  taxe* 
according  to  population  that  this  court  in  the  Pollock  case  held  the  statute  of 
1894  to  be  unconstitutional.  Upon  the  rehearing  of  the  case  Mr.  Chief  Justice 
Fuller,  who  spoke  for  the  court,  summarizing  the  effect  of  the  decision,  said: 

"  We  have  considered  the  act  only  in  respect  of  the  tax  on  income  derived 
from  real  estate,  and  from  invested  personal  property,  and  have  not  commented 
on  so  much  of  it  as  bears  on  gains  or  profits  from  business,  privileges,  or  em- 
ployments, in  view  of  the  instances  in  which  taxation  on  business,  privileges, 
or  employments  has  assumed  the  guise  of  an  excise  tax  and  been  sustained 
as  such."     158   U.   S.   635. 

And  as  to  excise  taxes,  the  chief  justice  said: 

"  We  do  not  mean  to  say  that  an  act  laying  by  apportionment  a  direct  tax- 
on  all  real  estate  or  personal  property,  or  the  income  thereof,  might  not  also  Inv 
excise  taxes  on  business,  privileges,  employments,  and  vocations."     Pasre  0.17. 

The  Pollock  case  was  before  this  court  in  Knowlton  v.  Aloore,  178  V.  S.  41. 
In  that  case  this  court  sustained  an  excise  tax  upon  the  transmission  of  prop 
crty  by  inheritance.     It  was  contended  there,  as  here,  that  tlie  case  was  rtiled 
by  the  Pollock  case,  and  of  that  case  this  court,  speaking  by  the  present  chief 
justice,  said : 


26  Fedkral  CoRPOKATiox  Tax  Law. 

"  The  issue  presented  in  the  Pollock  case  was  wiiether  an  income  tax  was 
direct  within  the  meaning  of  the  Constitution.  The  contentions  which  the 
ease  involved  were  thus  presented.  On  the  one  hand,  it  was  argued  that  only 
capitation  taxes  and  taxes  on  land  as  such  were  direct,  within  tlie  meaning  of 
the  Constitution,  considered  as  a  matter  of  first  impression,  and  that  previous 
adjudications  had  construed  the  Constitution  as  having  that  import.  On  the 
other  hand,  it  was  asserted  that,  in  principle,  direct  taxes,  in  the  constitutional 
SI  ;ise,  embraced  not  only  taxes  on  land  and  capitation  taxes,  but  all  burdena 
laid  on  real  or  personal  property  because  of  its  ownership,  which  were  equiva 
lent  to  a  direct  tax  on  such  property,  and  it  was  affirmed  that  the  previous 
adjudications  of  this  court  had  settled  nothing  to  the  contrary. 

■'  Undoubtedly,  in  the  course  of  tlie  opinion  in  the  Pollock  case  it  was  said 
that  if  a  tax  was  direct  within  the  constitutional  sense  the  mere  erroneous 
qualification  of  it  as  an  excise  or  duty  would  not  take  it  out  of  the  constitu- 
tional requirement  as  to  apportionment.  But  this  language  related  to  the 
.subject-matter  under  consideration,  and  was  but  a  statement  that  a  tax  which 
was  in  itself  direct,  because  imposed  upon  property  solely  because  of  its  own 
ership,  could  not  be  changed  by  affixing  to  it  the  qualifications  of  excise  or 
duty.  Hero  we  are  asked  to  decide  that  a  tax  is  a  direct  tax  on  property 
which  has  at  all  times  been  considered  as  the  antithesis  of  such  a  tax ;  that  is, 
that  it  has  ever  been  treated  as  a  duty  or  excise,  because  of  the  particular 

occasion  which  gives  rise  to  its  levy. 

•  ♦»•»•• 

"  Considering  that  the  constitutional  rule  of  apportionment  had  its  origin 
in  the  purpose  to  prevent  taxes  on  persons  solely  because  of  their  general 
ownership  of  property  from  being  levied  by  any  other  rule  than  that  of  appor 
tionment,  two  tilings  were  decided  by  the  court:  First,  that  nti  sound  dis- 
tinction existed  between  a  tax  levied  on  a  person  solely  because  of  his  general 
ownership  of  real  property,  and  the  same  tax  imposed  solely  because  of  his 
general  ownership  of  personal  property.  Secondly,  that  the  tax  on  the  income 
derived  from  such  property,  real  or  i)ersonal,  was  the  legal  equivalent  of  a 
direct  tax  on  tlie  property  from  which  said  income  was  derived,  and  hence 
must  be  apportioned.  These  conclusions,  however,  lend  no  support  to  the  con- 
tention that  it  was  decided  that  duties,  imposts  and  excises,  which  arc  not 
the  essential  <'(|uivalentH  of  a  tax  on  proix>rty  generally,  real  or  personal, 
solely  because  of  its  ownership,  must  be  converted  into  direct  taxes,  because 
it  is  conceived  that  it  would  be  demonstrated  by  a  close  analysis  that  they 
could  not  Iw  Hhift<'(i  from  the  person  upon  whom  they  first  fall." 

The  same  view  was  taken  of  the  Pollock  case  in  the  subsequent  case  of 
SpreckelH  Sugar  P<'fining  Co.  r.  McClain.   1!)2  V.  S.  397. 

The  act  now  iirulcr  considerntion  does  not  impose  din-rt  taxation  upon  prop 
erty  Hr)lely  because  of  its  ownership,  but  tlic  tax  is  within  the  class  which 
CongresH  in  authorized  to  lay  and  collect  under  artich'  1,  section  S,  clause  1, 
(if  the  Constitution,  and  described  generally  as  taxes,  duties,  imposts,  and 
excises,  upon  which  the  limitation  is  that  they  shall  be  uniform  tliroughout 
flic  I  'nited  States. 

W'it'iin  tli<'  category  of  indireet  taxation,  as  we  shall  have  further  occasion 
to  show,  is  embraced  a  tax  upon  business  done  in  a  corporate  eapaeitv,  which 
18  the  subject  matter  of  the  tax  imposed  in  the  act  unch-r  consideration.     Th* 


Constitutionality  of  the  Tax.  27 

Pollock  case  construed  the  tax  there  levied  as  direct,  because  it  was  imposed 
upon  property  simply  because  of  its  ownership.  In  the  present  case  the  tax 
is  not  payable  unless  there  be  a  carrying  on  or  doing  of  business  in  the  desig- 
nated capacity,  and  this  is  made  the  occasion  for  tlie  tax,  measured  by  the 
standard  prescribed.  The  difference  between  the  acts  is  not  merely  nominal, 
but  rests  upon  substantial  differences  between  the  mere  ownership  of  property 
and  the  actual  doing  of  business  in  a  certain  way. 

It  is  unnecessary  to  enter  upon  an  extended  consideration  of  the  technical 
meaning  of  the  term  "  excise."  It  has  been  the  subject-matter  of  considerablf 
discussion  —  the  terms  duties,  imposts,  and  excises  are  generally  treated  as 
embracing  the  indirect  forms  of  taxation  contemplated  by  the  Constitution. 
As  Mr.  Chief  Justice  Fuller  said  in  the  Pollock  case,  supra: 

"Although  there  have  been  from  time  to  time  intimations  that  there  might 
be  some  tax  which  was  not  a  direct  tax  nor  included  under  the  words  '  duties, 
imposts,  and  excises,'  such  a  tax  for  more  than  one  hundred  pears  of  national 
existence  has  as  yet  remained  undiscovered,  notwithstanding  the  stress  of 
particular  circumstances  has  invited  thorough  investigation  into  sources  of 
revenue." 

And  in  the  same  connection  the  chief  ju.stice,  delivering  the  opinion  of  the 
court  in  Thomas  v.  United  States,  192  U.  S.  363,  in  speaking  of  the  words 
duties,  imposts,  and  excises,  said: 

"  We  think  that  they  were  used  comprehensively  to  cover  customs  and  excise 
duties  imposed  on  importation,  consumption,  manufacture,  and  sale  of  certain 
commodities,  privileges,  particular  business  transactions,  vocations,  occupa- 
tions, and  the  like."' 

Duties  and  imposrte  are  terms  commonly  applied  to  levies  made  by  govern 
ments  on  the  importetion  or  exportation  of  commodities.     Excises  are  '"  taxes 
laid  upon  the  manufacture,  sale,  or  consumption  of  commodities  within  the 
country,    upon    licenses    to    pursue   certain    occupations,   and    upon   corporate 
privileges."     Cooley,  Cons.  Lim.    (7th  ed.)   680. 

The  tax  under  consideration,  as  we  have  construed  the  statute,  may  be  de- 
scribed as  an  excise  upon  the  particular  privilege  of  doing  business  in  a 
corporate  capacity,  i.  e..  with  the  advantages  which  arise  from  corporate  or 
^uosi-corporate  organization ;  or,  when  applied  to  insurance  companies,  for 
doing  the  business  of  such  companies.  As  was  said  in  the  Thomas  case,  102 
U.  S.,  supra,  the  requirement  to  pay  such  taxes  involves  the  exercise  of  privi 
leges,  and  the  element  of  absolute  and  unavoidable  demand  is  lacking.  If 
business  is  not  done  in  the  manner  described  in  the  statute,  no  tax  is  payable. 

If  we  are  correct  in  holding  that  this  is  an  excise  tax,  there  is  nothing  in 
the  Constitution  requiring  such  taxes  to  b:^  apportioned  according  to  popula 
tion.     Pacific  Ins.  Co.  v.  Soule,  7  Wall.  433;   Springer  r.  TTnited  States,   102 
U.  S.  586;  Spreckels  Sugar  Refining  Co..  192  U.  R.  397. 

Tt  is  next  contended  that  the  attempted  taxation  is  void  because  it  levies 
a  tax  upon  the  exclusive  right  of  a  State  to  grant  corporate  franchises.  Iiocansp 
it  taxes  franchises  which  are  the  creation  of  the  State  in  its  sovereign  right 
and  authority.  This  proposition  is  rested  upon  the  implied  limitation  upon 
the  powers  of  national  and  state  governments  to  take  action  which  encroaches 
upon  or  cripples  the  exercise  of  the  exclusive  power  of  sovereignty  in  tlie  other 
It  has  been  held  in  a  number  of  cases  that  the  State  cannot  tax   franchises 


28  Federal  Corporatioa'  Tax  Law. 

created  by  the  United  States  or  the  agencies  or  corporations  which  are  created 
for  the  purpose  of  carrying  out  governmental  functions  of  the  United  States. 
McCulloch  V.  Maryland,  4  Wheat.  316;  Osborn  r.  Bank,  9  Wheat.  738;  Rail- 
road Co.  r.  Peniston,  18  Wall.  5;  California  v.  Central  Pac.  R.  R.  Co.,  127 
U.  S.  1. 

An  examination  of  these  cases  will  show  that  in  each  case  where  the  tax 
was  held  invalid  the  decision  rested  upon  the  proposition  that  the  corporation 
was  created  to  cany  into  effect  powers  conferred  upon  the  federal  government 
in  its  sovereign  capacity,  and  the  attempted  taxation  was  an  interference  with 
the  effectual  exercise  of  such  powers. 

In  Osborn  r.  The  Bank,  supra,  a  leading  case  upon  the  subject,  whilst  it 
was  held  tliat  the  bank  of  the  United  States  was  not  a  private  corporation, 
but  a  public  one,  created  for  national  purposes,  and  therefore  beyond  the 
taxing  power  of  the  State,  Chief  Justice  Marsliall,  in  delivering  the  opinion  of 
the  court,  conceded  that  if  the  corporation  had  been  originated  for  the  man- 
agement of  an  individual  concern,  with  private  trade  and  profit  for  its  great 
end  and  principal  object,  it  might  be  taxed  by  the  State.  Said  the  chief 
justice: 

"  If  these  premises  [that  the  corporation  was  one  of  private  character]  were 
true,  the  conclusion  drawn  from  them  would  be  inevitable.  This  mere  private 
corporation,  engaged  in  its  own  business,  with  its  own  views,  would  certainly 
be  subject  to  the  taxing  power  of  the  State,  as  any  individual  would  be ;  and 
the  casual  circumstance  of  its  being  employed  by  the  government  in  the  trans- 
action of  its  fiscal  affairs  would  no  more  exempt  its  private  business  from  the 
operation  of  that  power  than  it  would  exempt  the  private  business  of  any 
individual  employed   in   the  same  manner." 

The  inquiry  in  this  connection  is:     How  far  do  the  implied  limitations  upon 
tlie  taxing  power  of  the  United  States  over  objects  which  would  otherwise  be 
legitimate  subjects  of  federal  taxation,  withdraw  them  from  the  reach  of  the 
federal  government  in  raising  revenue,  because  they  are  pursued  under  fran 
chises  wliich  are  the  creation  of  the  States? 

In  approacliing  this  subject  we  must  remember  that  enactments  levying 
taxes,  as  otlior  laws  of  the  federal  government  when  acting  within  constitu- 
tional authority,  are  the  supreme  law  of  the  land.  The  Constitution  contains 
only  two  limitations  on  the  right  of  Congress  to  levy  excise  taxes;  they  must 
be  levied  for  tiie  public  welfare  and  are  required  to  be  uniform  throughout  the 
United  States.  As  Mr.  Chief  Justice  Chase  said,  speaking  for  the  court  in 
License  Tax  Cases,  T)  Wall.  402,  471:  "Congress  cannot  tax  exports,  and  it 
must  impose  direct  taxes  l)y  tlie  rul(>  of  apportionment,  and  indirect  taxes  by 
the  rule  of  uniformity.  Tims  limited  and  thus  only,  it  reaches  every  subject 
ami  may  be  ex«'rci3cd  at  discretion."  Tlie  limilations  to  which  the  chief 
justice  refers  Wfrn  Ww  only  ones  imposed  in  (lie  Constitution  upon  the  taxing 
power. 

In  McCray  v.  United  States,  Ifl.')  U.  S.  27.  this  court  sustained  a  federal 
tax  on  fdeomargarino,  artificially  colored,  and  held  that  while  the  Fifth  and 
T'lilli  ArTicndm<'nlH  (pialify.  ^o  far  as  ajiplicablc,  all  flic  provisions  of  the  Con 
stitiitjon,  nothing  in  thorn'  amcnilments  operates  to  take  away  the  power  to  tax 
conferred  by  tlio  Const itntion  on  the  Congress.  In  thai  ease  it  was  contended 
that  the   Hul)j<'rt   taxed    was   within   the  exclusive  domain   of  the   States,   and 


CoiiSTlTUTIONALlTY    OF    THE    TaX.  A'J 

i.iat  ti.e  real  purpose  of  Congress  was  not  to  raise  revenue,  but  to  tax  out  of 
existence  a  substance  not  harmful  uf  itself  and  one  wliicli  might  be  lawfully 
manufactured  and  sold;  but,  the  only  cnn.stitutional  limitation  whicii  this 
court  conceded,  in  addition  to  the  requirement  of  uniformity,  and  that  for  the 
sake  of  argument  only  so  far  as  concerned  the  case  then  under  consideration, 
was  that  Congress  is  restrained  from  arbitrary  impositions  or  from  exc^-eding 
its  powers  in  seeking  to  effect  unwarranted  ends.  The  limitation  of  unif<jrmity 
was  deemed  sufficient  by  those  who  framed  and  adopted  the  Constitution. 
The  courts  may  not  add  others.  Patton  v.  Brady,  184  U.  S.  608,  622.  And 
see  United  States  v.  Singer,  15  Wall.  Ill,  121;  Nicol  v.  Ames,  173  U.  S.  509, 
515. 

We  must  therefore  enter  upon  the  inquiry  as  to  implied  limitations  upon 
the  exercise  of  the  federal  authority  to  tax  because  of  the  sovereignty  of  the 
States  over  matters  within  their  exclusive  jurisdiction,  having  in  view  the 
nature  and  extent  of  the  power  specifically  conferred  upon  Congress  by  tho 
Constitution  of  the  United  States.  We  must  remember,  too,  that  the  revenues 
of  the  United  States  must  be  obtained  in  the  same  terriory,  from  the  same 
people,  and  excise  taxes  must  be  collected  from  the  same  activities,  as  are  also 
reached  by  the  States  in  order  to  support  their  local  government. 

While  the  tax  in  this  case,  as  we  have  construed  the  statute,  is  imposed 
upon  the  exercise  of  the  privilege  of  doing  business  in  a  corporate  capacity, 
as  such  business  is  done  under  authority  of  State  franchises,  it  becomes  neces- 
sary to  consider  in  this  connection  the  right  of  the  federal  government  to  tax 
the  activities  of  private  corporations  which  arise  from  the  exercise  of  fran- 
chises granted  by  the  State  in  creating  and  conferring  powers  upon  such  cor- 
porations. We  think  it  is  the  result  of  the  cases  heretofore  decided  in  this 
court,  that  sucn  business  activities,  though  exercised  because  of  State  created 
franchises,  are  not  beyond  the  taxing  power  of  the  United  States.  Taxes  upon 
rights  exercised  under  grants  of  State  franchises  were  sustained  by  this  court 
in  Railroad  Co.  r.  Collector,  100  U.  S  5fl5 ;  United  States  r.  Erie  R.  R.  Co., 
106  U.  S.  327;  Spreckels  Sugar  Refining  Co.  r.  McClain,  192  U.  S.  397. 

It  is  true  that  in  those  cases  the  question  does  not  seem  to  have  been  di- 
rectly made,  but,  in  sustaining  such  taxation,  the  right  of  the  federal  govern- 
ment to  reach  such  agencies  was  necessarily  involved.  The  question  was  raised 
and  decided  in  the  case  of  Veazie  Bank  r.  Fenno,  8  Wall.  533.  In  that  well- 
known  case  a  tax  upon  the  notes  of  a  State  bank  issued  for  circulation  was 
sustained.     Mr.  Chief  -Justice  Chase,  in  the  course  of  the  opinion,  said : 

"  Is  it,  then,  a  tax  on  a  franchise  granted  by  a  State,  which  Congress,  upon 
any  principle  exempting  the  reserved  powers  of  the  States  from  impairment 
by  taxation,  must  be  held  to  have  no  authority  to  lay  and  collect? 

"  We  do  not  say  that  there  may  not  be  such  a  tax.  It  may  be  admitted 
that  the  reserved  rights  of  the  States,  such  as  the  right  to  pass  laws,  to  give 
effect  to  laws  through  executive  action,  to  administer  justice  through  the 
courts,  and  to  employ  all  necessary  agencies  for  legitimate  purposes  of  States 
government,  are  not  proper  subjects  of  the  taxing  power  of  Consrress.  But 
it  cannot  be  admitted  that  franchises  granted  by  a  State  are  necessarily  ex- 
empt from  taxation;  for  franchises  are  property,  often  very  valuable  ann 
productive  property;  and  when  not  conferred  for  the  purpose  of  givine  effect 
to  some  reserved  power  of  a  State,  seem  to  be  as  properly  objects  of  taxatior 
as  any  other  property. 


30  Federal  Coeporation  Tax  Law. 

"  But  in  the  case  before  us  the  object  i)f  taxation  is  not  the  franchise  of  the 
bank,  but  property  created,  or  contracts  made  and  issued  under  the  franchise, 
or  power  to  issue  bank  bills.  A  railroad  company,  in  the  exercise  of  its  cor- 
porate franchises,  issues  freight  receipts,  bills  of  lading,  and  passenger  tickets.; 
and  it  cannot  be  doubted  that  the  organization  of  railroads  is  quite  as  im- 
portant to  the  State  as  the  organization  of  banks.  l>ut  it  will  hardly  be  ques- 
tioned that  these  contracts  of  the  company  are  objects  of  taxation  within 
the  powers  of  Congress,  and  not  exempted  by  any  relation  to  the  State  which 
granted  the  charter  of  the  railroad.  And  it  seems  difficult  to  distinguish  the 
taxation  of  notes  issued  for  circulation  from  the  taxation  of  these  railroad 
contracts.  Both  descriptions  of  contracts  are  means  of  profit  to  the  corpora- 
tions which  issue  them;  and  both,  as  we  think,  may  properly  be  made  con- 
tributory to  the  public  revenue."     Pages  547,  548. 

It  is  true  that  the  decision  in  the  Veazie  Bank  case  was  also  placed,  in  a 
measure,  upon  the  authority  of  the  United  States  to  control  the  circulating 
medium  of  the  country,  but  the  force  of  the  reasoning,  which  we  have  quoted, 
has  not  been  denied  or  departed  from. 

In  Thomas  v.  United  States,  192  U.  S.,  supra,  a  federal  tax  on  the  transfer 
of  corporate  shares  in  State  corporations  was  upheld  as  a  tax  upon  business 
transacted  in  the  exercise  of  privileges  afforded  by  the  State  laws  in  respect 
to  corporations. 

In  Nicol  V.  Ames,  173  U.  S.  509,  a  federal  tax  was  sustained  upon  the  en- 
joynu'nt  of  privileges  afforded  by  a  board  of  trade  incorporated  by  the  State 
of  Illinois. 

When  the  Constitution  was  framed  the  right  to  lay  excise  taxes  was  broadly 
conferred  upon  the  Congress.  At  that  time  very  few  corporations  existed. 
If  the  mere  fact  of  State  incorporation,  ext<'nding  now  to  nearly  all  branches 
of  trade  and  industry,  could  withdraw  the  legitimate  objects  of  federal  taxa- 
tion from  the  exercise  of  the  power  conferred,  the  result  would  be  to  exclude 
the  national  government  from  many  objects  upon  which  indirect  taxes  coul;l 
be  constituticjnally  imposed.  Let  it  be  supposed  that  a  group  of  individuals, 
as  partners,  were  carrying  on  a  business  upon  wliich  Congress  concluded  to 
lay  an  excise  tax.  If  it  be  true  that  the  forming  of  a  State  corporation  would 
defeat  this  purpose,  by  taking  the  necessary  steps  required  by  the  State  law  u> 
create'  a  (rorjioratioii  and  carrying  on  the  business  under  rights  granted  by  a 
State  statute,  the  federal  ta.x  would  become  invalid  and  that  source  of  national 
revenue  be  destroyed,  except  as  to  the  business  in  the  hands  of  individuals  or 
partnerships.  It  cannot  be  suppo.sed  tlial  it  was  in(<'n(!cd  that  it  should  l)e 
within  the  jjower  of  individuals  acting  un(i<'r  State  autlmrity  to  thus  impair 
and  limit  tiu;  exertion  of  authority  wliich  may  be  c.s.sential  to  national 
exJHt^'nce. 

In  thi^  cnnnictiiin  Soutli  Carnjina  r.  United  States.  199  I'.  S.  4.'t7.  is  im- 
portant. In  tliat  case  it  was  held  that  the  agents  of  th<'  Stat<'  govcrninenl. 
carrying  on  tlie  business  of  sellinjr  li(|uor  under  State  authority,  were  liabU* 
to  pay  the  internal  revenue  tax  imposed  i)\  (lie  foderal  government.  In  the 
opinion  previous  cases  in  this  ermrl  were  reviewed,  ami  the  iiih'  In  1m'  iledueed 
tlx-refroni  stated  to  be  that  t hi' e\ein|i1  inn  of  State  agencies  and  inst  rumentali- 
ties  from  national  taxation  was  limited  to  thos*'  of  a  strictly  governmental 
character,  and  did  not  extend  In  thos<'  uK<'d  by  the  State  in  carrying  on  buai 
nesB  of  a  private  character.      199  U.  S.  461. 


Constitutionality  of  the  Tax.  :jl 

'fhe  cases  unite  in  exempting  from  federal  taxation  tlio  means  and  infltru- 
mentalities  employed  in  carrying  on  the  governnu-ntal  operations  of  the  State. 
The  exercise  of  such  rights  as  the  establishment  of  a  judiciary,  the  employ- 
ment of  officers  to  administer  and  execute  the  laws  and  similar  governmental 
functions  cannot  be  taxed  by  tiie  federal  gov<'rnmcnt.  The  Collector  r.  Hay, 
11  W'lall.  113;  United  States  v.  R.  R.  Co.,  17  Wall.  322;  Ambrosini  v.  United 
States,  187  U.  S.  1. 

But  this  limitation  has  never  been  extended  to  the  exclusion  of  the  activities 
of  a  merely  private  business  from  the  federal  taxing  power,  although  tlie 
power  to  exercise  them  is  derived  from  an  act  of  incorporation  by  one  of  thf 
States.  We,  therefore,  reach  the  conclusion  that  the  mere  fact  that  the  busi- 
ness taxed  is  done  in  pursuance  of  authority  granted  by  a  State  in  the  creation 
of  private  corporations  does  not  exempt  it  from  the  exercise  of  federal  author- 
ity to  levy  excise  taxes  upon  such  privileges. 

But,  it  is  insisted,  this  taxation  is  so  unequal  and  arbitrary  in  the  fact 
that  it  taxes  a  business  when  carried  on  by  a  corporation  and  exempts  a 
similar  business  when  carried  on  by  a  partnership  or  private  individual  as  to 
place  it  beyond  the  authority  conferred  upon  ('ongress.  As  we  liave  seen,  the 
only  limitation  upon  the  authority  conferred  is  uniformity  in  laying  the  tax, 
and  uniformity  does  not  require  the  equal  application  of  the  tax  to  all  persons 
or  corporations  who  may  come  within  its  operation,  but  is  limited  to  geo 
graphical  uniformity  throughout  the  United  Stat<*s.  Tliis  subject  was  fully 
discussed  and  set  at  rest  in  Knowlton  v.  Moore,  178  U.  S.,  supra,  and  we  can 
add  nothing  to  the  discussion  contained  in  that  case. 

In  levying  excise  taxes  the  most  ample  authority  has  been  recognized  from 
the  beginning  to  select  some  and  omit  other  possible  subjects  of  taxation,  to 
select  one  calling  and  omit  another,  to  tax  one  class  of  property  and  to  forbear 
to  tax  another.  For  examples  of  such  taxation,  see  the  following  cases  decided 
in  this  court,  upholding  the  power: 

Hylton  V.  United  States,  3  Dall.  171  (a  tax  on  carriages  which  the  owner 
kept  for  private  use)  ;  Nicol  v.  Ames,  173  U.  S.  509  (a  tax  upon  sales  or  ex- 
changes of  boards  of  trade)  ;  Knowlton  r.  Moore,  178  U.  S.  41  (a  tax  on  the 
transmission  of  property  from  the  dead  to  the  living)  ;  Treat  r.  White.  181 
U.  S.  264  (a  tax  on  agreements  to  sell  shares  of  stock,  denominated  "calls" 
by  stockbrokers)  ;  Patton  v.  Brady,  184  U.  S.  608  (a  tax  on  tobacco  manu 
factured  for  consumption,  and  imposed  at  a  period  intermediate  the  commence 
ment  of  manufacture  and  tlie  final  consimiption  of  the  article)  ;  Cornell  r. 
Coyne,  192  U.  S.  418  (a  tax  on  "filled  cheese"  manufactured  expressly  for 
export)  ;  McCray  v.  United  States,  195  U.  S.  27  (a  tax  on  oleomargarine  not 
artificially  colored,  a  higher  tax  on  oleomargarine  artificially  colored  and  no 
tax  on  butter  artificially  colored)  :  Thomas  v.  United  States,  102  U.  S.  363 
(a  tax  on  sales  of  shares  of  stock  in  corporations)  ;  Pacific  Insurance  Co.  ;•. 
Soule,  7  Wall.  433  (tax  upon  the  amounts  insured,  renewed,  or  continued  bv 
Insurance  companies  upon  the  gross  amounts  of  premiums  received  and  assess- 
ments made  by  them,  and  also  upon  dividends,  undistributed  sums,  and  in 
comes)  ;  Veazie  Bank  r.  Fenno,  8  Wall.  533  (a  tax  of  ten  per  centum  on  tlie 
amount  of  the  notes  paid  out  of  any  State  bank,  or  State  bankiii<:  associa- 
tion) ;  Seholey  r.  Rew,  23  Wall.  331  (a  tax  on  devolutions  of  title  to  real 
estate)  ;   Spreckels  v.  Sugar  Refining  Co.,   102  U.  S.  307    (a  tax  on  the  gross 


32  Federal  CoRPOR^iTiON  Tax  Law. 

receipts  of  corporations  and  companies,  in  excess  of  $250,000,  engaged  iff 
refining  sugar  or  oil)  ;  Kailroad  Co.  v.  Collector,  100  U.  S.  595  (a  tax  laid  in 
terms  upon  the  amounts  paid  by  certain  public  service  corporations  as  interest 
on  their  funded  debt,  or  as  dividends  to  their  stockholders,  and  also  on  "  all 
profits,  incomes,  or  gains  of  sucli  company,  and  all  profits  of  such  company 
carried  to  the  account  of  any  fund,  or  used  for  construction."  Held  to  be  a 
tax  upon  the  company's  earnings  and  therefore  essentially  an  excise  upon  the 
business  of  the  corporations)  ;  Springer  r.  United  States,  102  U.  S.  5S(i  (a 
duty  provided  by  the  internal  revenue  acts  to  be  assessed,  collected,  and  paid 
upon  gains,  profits,  and  incomes,  held  to  be  an  excise  or  duty  and  not  a  direct 
tax). 

Many  instances  might  be  given  where  this  court  has  sustained  tlie  right  of 
a  State  to  select  subjects  of  taxation,  although  as  to  them  the  Fourteenth 
Amendment  imposes  a  limitation  upon  State  legislatures,  requiring  that  no 
person  shall  be  denied  the  equal  protection  of  the  laws.  See  the  following 
cases : 

Beers  r.  Glynn,  211  U.  S.  477  (a  State  tax  on  personalty  or  nonresident 
decedents  who  owned  realty  in  the  State)  ;  Hatch  v.  Reardon,  204  U.  S.  152 
(a  State  tax  on  the  transfers  of  stock  made  within  the  State)  ;  Armour  Pack- 
ing Co.  V.  Lacy,  200  U.  S.  226  (a  State  license  tax  on  meat  packing  houses. 
A  foreign  corporation  selling  its  products  in  the  State,  but  whose  packing 
establislunents  are  not  situated  in  the  State,  is  not  exempt  from  such  license 
tax)  ;  Savannah,  Thunderbolt  &  Isle  of  Hope  Ry.  v.  Savannah,  198  U.  S.  392 
(a  classification  which  distinguishes  between  an  ordinary  street  railway  and  a 
steam  railroad,  making  an  extra  charge  for  local  deliveries  of  freight  brought 
over  its  road  from  outside  the  city,  held  not  to  be  such  a  classification  as  t<7 
make  the  tax  void  under  the  Fourteenth  Amendment)  ;  Cook  v.  Marshall 
County,  196  U.  S.  261  (State  tax  on  cigarette  dealers)  ;  Magoun  v.  Illinois 
Trust  &  Savings  Bank,  170  U.  S.  283  (uj)holding  the  graded  inheritance  tax 
law  of  Illinois)  ;  Bell's  Gap  R.  R.  Co.  r.  Pennsylvania,  134  U.  S.  232  (State 
tax  upon  the  nominal  face  value  of  bonds,  instead  of  their  actual  value,  held 
a  valid  part  of  the  State  system  of  taxation). 

In  Bell's  Gap  R.  R.  Co.  v.  Pennsylvania,  134  U.  S.  232,  dealing  with  the 
Fourteenth  Aincndnient,  which  in  this  respect  imposes  limitations  only  on 
State  authority,  this  court  said: 

"The  provision  in  the  Fourteenth  Amendment,  that  no  State  shall  deny  to 
nnv  person  witliin  its  jurisdiction  the  eqtial  protection  of  the  laws,  was  not 
intended  to  f)rev('nt  a  State  from  adjusting  its  system  of  taxation  in  all 
proper  and  reasoniihle  ways,  it  may,  if  it  cliooses,  exempt  certain  classes  of 
property  from  any  taxation  at  all,  such  as  churches,  libraries,  and  the  prop- 
erty of  c'liaritabie  instittitions.  It  may  impose  difTerent  specific  taxes  upon 
did'erent  trad<'H  and  professions,  and  may  vary  the  rates  of  excise  upon  various 
products;  it  may  tax  real  estate  imd  prrsnual  property  in  a  dilTen-nt  manner; 
it  may  tax  visible  property  only,  and  not  tax  securities  for  payment  of  money; 
it  may  allow  deductions  for  indebtedness,  or  not  allow  them.  ,\11  such  regu- 
lations, and  those  of  lik<'  cliaract<T,  so  long  as  they  proceed  witliin  reasonable 
limits  and  general  usage,  are  witliin  thi'  discretion  of  tlw  State  legislature, 
or  the  people  of  the  State  in  framing  their  Constitution." 

It  is   insisted   in  some  of   (lie  briefs  assailing  the  validity  of  this  tax   that 


Constitutionality  of  the  Tax,  33 

tliesc  cases  have  been  mottilied  by  Suuthern  K.  K.  Co.  r.  (ireenc.  210  U.  S.  400. 
Ill  tliat  case  a  coi poratiun  organized  in  a  State,  other  tlian  Alabama,  carao 
into  that  State  in  compliance  with  its  laws,  paid  tin-  litLiise  tax  and  propprly 
tax  imposed  upon  other  corporations  doing  business  in  the  State,  and  acquired 
under  direct  sanction  of  the  laws  of  tlie  State  a  large  amount  of  i)roperty 
liierein,  and,  when  it  was  attemj)te(l  to  subject  it  to  further  tax  on  the  ground 
that  it  was  for  the  privilege  of  doing  business  as  a  foreign  corporation,  when 
the  same  tax  was  not  imposed  upon  State  corporations  doing  precisely  the 
same  business,  in  the  same  way,  it  was  held  tiiat  the  attempted  taxation  was 
merely  arbitrary  classification,  and  void  under  the  Fourteenth  Amendment. 
In  that  case  the  foreign  corporation  was  doing  business  under  the  sanction  ot 
the  State  laws  no  less  than  the  local  corporation;  it  had  acquired  its  property 
under  sanction  of  those  laws;  it  had  paid  all  direct  and  indirect  taxes  levied 
against  it,  and  there  was  no  practical  distinction  between  it  and  a  State  cor- 
poration doing  the  same  business  in  the  same  way. 

In  the  case  at  bar  we  have  already  discussed  the  limitations  which  the 
(Constitution  imposes  upon  the  right  to  levy  excise  taxes,  and  it  could  not  be 
said,  even  if  the  principles  of  tlie  Fourteenth  Amendment  were  applifal)le  to 
the  present  case,  that  there  is  no  substantial  difference  between  the  carrying 
on  of  business  by  the  corporations  taxed,  and  the  same  business  when  con- 
ducted by  a  private  firm  or  individual.  The  thing  taxed  is  not  the  mere 
dealing  in  merchandise,  in  which  the  actual  transactions  may  be  the  same, 
whether  conducted  by  individuals  or  corporations,  but  the  tax  is  laid  upon 
the  privileges  which  exist  in  conducting  business  with  the  advantages  which 
inhere  in  the  corporate  capacity  of  those  taxed,  and  which  are  not  enjoyed  by 
private  firms  or  individuals.  These  advantages  are  obvious,  and  have  led  to 
the  formation  of  such  companies  in  nearly  all  branches  of  trade.  The  con- 
tinuity of  the  business,  without  interruption  by  death  or  dissolution,  the 
transfer  of  property  interests  by  the  disposition  of  shares  of  stock,  the  advan- 
tages of  business  controlled  and  managed  by  corporate  directors,  the  general 
absence  of  individual  liability,  these  and  other  things  inhere  in  the  advantages 
of  business  thus  conducted,  which  do  not  exist  when  the  same  business  is  con- 
ducted by  private  individuals  or  partnerships.  It  is  this  distinctive  privilege 
which  is  the  subject  of  taxation,  not  the  mere  buying  or  selling  or  handling 
of  goods  which  may  be  the  same,  whether  done  by  corporations  or  individuals. 

It  is  further  contended  that  some  of  the  corporations,  notably  insurance 
companies,  have  large  investments  in  municipal  bonds  and  other  nontaxable 
securities,  and  in  real  estate  and  personal  property  not  used  in  the  business, 
that  therefore  the  selection  of  the  measure  of  the  income  from  all  sources  ia 
void,  because  it  reaches  property  which  is  not  the  subject  of  taxation  —  upon 
the  authority  of  the  Pollock  case,  supra.  But  tliis  argument  confuses  the 
measure  of  the  tax  upon  the  privilege,  with  direct  taxation  of  the  estate  or 
thing  taxed.  In  the  Pollock  case,  as  we  have  seen,  the  tax  was  held  uncon- 
stitutional, because  it  was  in  effect  a  direct  tax  on  the  property  solely  because 
of  its  ownership. 

Nor  does  the  adoption  of  this  measure  of  the  amount  of  the  tax  do  violence 

to  the  rule   laid   down  in  Galveston,  Harrisburg  &   San  Antonio   Ry.  Co.   v. 

T«cas,  210  U.  S.  217,  nor  the  Western  I'ninn  Tel.  Co.  r.  Kansas,  21G  U.  S.  1. 

In  the  Galveston  case  it  was  held  that  a  tax  imposed  by  the  State  of  Texas, 

Fed.  Corp.  Tax  — 3 


34  Federal  Corpokation  Tax  Law. 

equal  to  one  per  cent,  upon  the  gross  receipts  "  from  every  source  whatever  " 
of  lines  of  railroad  lying  wholly  within  the  State,  was  invalid  as  an  attempt 
to  tax  gross  receipts  derived  from  the  carriage  of  passengers  and  freight  in 
interstate  commerce,  which  in  some  instances  was  much  the  larger  part  of  the 
gross  receipts  taxed.  This  court  held  that  this  act  was  an  attempt  to  burden 
commerce  among  the  States,  and  the  fact  that  it  was  declared  to  be  "  equal 
to  "  one  per  ceirt.  made  no  dillerence,  as  it  was  merely  an  ettort  to  reach  gross 
receipts  by  a  tax  not  even  disguised  as  an  occupation  tax,  and  in  nowise  helped 
by  the  words  "  equal  to."  In  other  words,  the  tax  was  held  void,  as  its  sub- 
stance and  manifest  intent  was  to  tax  interstate  commerce  as  such. 

In  the  Western  Union  Telegraph  cases  tiie  State  undertook  to  levy  a  graded 
charter  fee  upon  the  entire  capital  stock  of  one  hundred  millions  of  dollars 
of  the  Western  Union  Telegrapli  (Company,  a  foreign  corporation,  and  engaged 
in  commerce  among  the  States,  as  a  condition  of  doing  local  business  within 
the  State  of  Kansas.  This  court  held,  looking  through  forms  and  reaching 
the  substance  of  the  thing,  that  the  tax  thus  imposed  was  in  reality  a  tax 
upon  the  riglit  to  do  interstate  commerce  within  the  State,  and  an  undertaking 
to  tax  property  beyond  the  limits  of  the  State;  that  whatever  the  declared 
purpose,  when  reasonably  interpreted,  the  necessary  operation  and  effect  of  the 
act  in  question  was  to  burden  interstate  commerce  and  to  tax  property  beyond 
the  jurisdictioTi  of  tlie  State,  and  it  was  therefore  invalid. 

There  is  nothing  in  these  cases  contrary,  as  we  shall  have  occasion  to  see, 
to  the  former  rulings  of  this  court  which  hold  that  where  a  tax  is  lawfully 
imposed  upon  the  exercise  of  privileges  within  the  taxing  power  of  the  State 
or  nation,  the  measure  of  such  tax  may  be  the  income  from  the  property  of 
the  corporation,  although  a  part  of  such  income  is  derived  from  property  in 
itself  nontaxable.  The  distinction  lies  between  the  attempt  to  tax  the  prop- 
erty as  .such  and  to  measure  a  legitimate  tax  upon  the  privileges  involved  in 
the  use  of  such  property. 

In  Home  Ins.  Co.  v.  New  York,  134  U.  S.  594,  a  tax  was  sustained  upon  the. 
right  or  privilege  of  the  Home  Insurance  Company  to  be  a  corporation,  and 
to  do  business  within  the  State  in  a  corporate  capacity,  the  tax  being  meas- 
ured by  the  ext'-nt  of  the  dividends  of  the  c(M'porati()n  in  the  current  year 
iilinii  the  capital  stock.  Although  a  very  large  anio\iiit,  iu'miIv  two  of  three 
millions  of  cai)it;il  ^tcck  was  invested  in  bonds  of  tlie  United  States,  expressly 
exempted  from  taxation  by  a  statute  of  the  United  Slates,  the  tax  was  sus- 
tained as  a  ino(h>  of  nieasdrenient  of  .a  privih'ge  tux  wliich  it  was  witliin  tlic 
lawful  ;mtli<iiity  of  tlie  Stnte  In  iiiipoNC.  Mr.  .Iiistiee  I'^'iidil,  who  delivered 
the  opinion  of  the  court,  n-viewed  the  previous  eases  in  this  eouit,  holdintj 
that  the  State  enuld  not  tax  or  l)urden  the  operation  of  tlu»  Cojistitution  and 
of  laws  enacted  by  tlw  Congress  to  carry  into  execution  the  powers  vested  in 
the  general  government.  ^'i(•l(Iing  full  assciit  to  those  cases,  Mr.  Justice  Field 
Raid  of  the  tax  then  under  consideration:  "  It  is  not  a  tax  in  terms  upon  the 
oafiifal  stock  of  tlu-  eomymny,  nor  iipon  any  bonds  of  the  United  States  com- 
posing a  part  of  that  stock.  Tho  statute  designates  it  a  tax  upon  the  'cor- 
porate fr:incliisc  or  Ini  ^incMH  '  of  the  company,  and  reference  is  only  made,  to 
itH  capital  stock  and  dividends  for  the  purpose  of  determining  the  amount  of 
tho  tax  to  be  exacted  each  year."  In  that  case,  in  the  course  of  the  oiiinion, 
previous  c.^'^r«^  of  \h\■^  entirt  were  cit"d  with  apnrovnl.  Societv  for  Savinp^ 
D.  Coite,  fl  Wall.  594;   Provident  Institution  v.  MaHsachusetts,  0  Wall.  fill. 


Constitutionality  of  tiipj  Tax.  35 

In  the  Coitc  case  a  privilege  tax  upon  tli«  total  amount  of  deposits  in  a 
aavings  bank  was  sustained,  althougli  $500,000  of  tlie  (lei)OHit.s  had  Ikm-u  in 
vested  in  securities  of  the  United  States,  and  declared  by  Act  of  Congress  to 
Ix;  exempt  from  taxation  by  State  authority.  In  that  case  the  court  said: 
"  Nothing  can  be  more  certain  in  legal  decision  than  that  the  privileges  and 
franchises  of  a  private  corporation,  and  all  trades  and  avocations  by  which 
the  citizens  acquire  a  livelihood,  may  be  taxed  by  a  State  for  the  support  of 
the  Slate  government.  Authority  to  that  effect  resides  in  the  State  inde- 
pendently of  the  federal  government,  and  is  wholly  unaffected  by  the  fact  that 
the  corporation  or  individual  has  or  has  not  made  investment  in  federal  secu 
rities."  In  Provident  Institution  v.  Massachusetts,  supra,  a  like  tax  was 
sustained. 

It  is  therefore  well  settled  by  the  decisions  of  this  court  that  when  the 
sovereign  authority  has  exercised  the  right  to  tax  a  legitimate  subject  ox 
taxation  as  an  exercise  of  a  franchise  or  privilege,  it  is  no  objection  that  tho 
measure  of  taxation  is  found  in  the  income  produced  in  part  from  proi)erty 
which  of  itself  considered  is  nontaxable.  Applying  that  doctrine  to  this  case, 
the  measure  of  taxation  being  the  income  of  the  corporation  from  all  sources, 
us  that  is  but  the  measure  of  a  privilege  tax  within  the  lawful  authority  of 
Congress  to  impose,  it  is  no  valid  objection  that  this  measure  includes,  in 
part  at  least,  property  which  as  such  could  not  be  directly  taxed.  See  in  this 
connection  Maine  v.  Grand  Trunk  Ry.,  142  U.  S.  217,  as  interpreted  in  Gal- 
veston, Harrisburg  &  San  Antonio  Ry.  Co.  v.  Texas,  210  U.  S.  217,  226. 

It  is  contended  that  measurement  of  the  tax  by  the  net  income  of  the  cor 
poration  or  company  received  by  it  from  all  sources  is  not  only  unequal,  but 
so  arbitrary  and  baseless  as  to  fall  outside  of  the  authority  of  the  taxin" 
power.  But  is  tliis  so  ?  Conceding  the  power  of  Congress  to  tax  the  business 
activities  of  private  corporations,  including,  as  in  this  case,  the  privilege  of 
carrying  on  business  in  a  corporate  capacity,  the  tax  must  be  measured  by 
some  standard,  and  none  can  be  chosen  which  will  operate  with  absolute  jus- 
tice and  equality  upon  all  corporations.  Some  corporations  do  a  large  business 
upon  a  small  amount  of  capital ;  others  with  a  small  business  may  have  a 
large  capital.  A  tax  upon  the  amount  of  business  done  might  operate  as 
unequally  as  a  measure  of  excise  as  it  is  alleged  the  measure  of  income  from 
all  sources  does.  Nor  can  it  be  justly  said  that  investments  have  no  real 
relation  to  tlie  business  transacted  by  a  corporation.  The  possession  of  large 
assets  is  a  business  advantage  of  great  value;  it  may  give  credit  which  will 
result  in  more  economical  business  methods;  it  may  give  a  standing  whicli 
shall  facilitate  purchases;  it  may  enable  the  corporation  to  enlarge  the  field 
of  its  activities  and  in  many  ways  give  it  business  standing  and  prestige. 

It  is  true  that  in  the  Spreckels  Case,  192  U.  S.,  supra,  the  excise  tax,  for 
the  privilege  of  doing  business,  was  based  upon  the  busine^ss  assets  in  use  by 
the  company,  but  this  was  because  of  the  express  terms  of  the  statute  which 
thus  limited  the  measure  of  the  excise.  The  statute  now  under  consideration 
bears  internal  evidence  that  its  draftsman  had  in  mind  language  used  in  the 
opinion  in  the  Spreckels  case,  and  the  measure  of  taxation,  the  income  from  all 
sources,  was  doubtless  inserted  to  prevent  the  limitation  of  the  measurement 
of  the  tax  to  the  income  from  business  assets  alone.  There  is  no  rule  which 
permits  a  court  to  say  that  the  measure  of  a  tax  for  the  privilege  of  doing 


36  Federal  Corporation  Tax  Law. 

business,  where  income  from  property  is  the  basis,  must  be  limited  to  that 
derived  from  property  which  may  be  strictly  said  to  be  actively  used  in  the 
business.  Departures  from  that  rule  sustained  in  this  court  are  not  wanting. 
In  United  States  r.  Singer,  15  Wall.  Ill,  an  excise  tax  was  sustained  upon  the 
liquor  business,  which  was  fixed  by  the  payment  on  an  amount  not  less  than 
eighty  per  cent,  of  the  total  capacity  of  the  distillery.  Whether  sucli  capacity 
was  used  in  the  business  was  a  matter  of  indifference,  and  this  court  said  of 
such  a  measure: 

"  Every  one  is  advised  in  advance  of  the  amount  he  will  be  required  to  pay 
if  he  enters  into  the  business  of  distilling  spirits,  and  every  distiller  must 
know  the  producing  capacity  of  his  distillery.  If  he  fail  under  these  circum- 
stances to  produce  the  amount  for  which  by  the  law  he  will  in  any  event  be 
taxed  if  he  undertakes  to  distill  at  all,  he  is  not  entitled  to  much  considera- 
tion." 

In  Society  for  Savings  v.  Coite,  6  Wall.,  supra,  and  Provident  Institution  v. 
Alassachusetts,  G  Wall.,  supra,  as  we  have  seen,  the  amount  of  excise  was 
measured  by  the  amount  of  bank  deposits.  It  made  no  difference  that  the 
deposits  were  not  used  actively  in  the  business. 

In  Hamilton  Co.  v.  Massachusetts,  6  Wall.  632,  the  ^-ax  was  measured  by 
the  excess  of  the  market  value  of  the  corporation's  capital  stock  above  tho 
value  of  its  real  estate  and  machinery,  and  in  this  connection  see  Home  Ins. 
Co.  V.  New  York,  134  U.  S.,  supra,  where  the  excise  was  computed  upon  the 
entire  capital  stock  measured  by  the  extent  of  the  dividends  thereon. 

We  must  not  forget  that  the  right  to  select  the  measure  and  objects  of 
taxation  devolves  upon  the  Congress  and  not  upon  the  courts,  and  such  selec- 
tions are  valid  unless  constitu clonal  limitations  are  overstepped.  "  It  is  no 
part  of  the  function  of  a  court  to  inquire  into  the  reasonableness  of  the  excise, 
either  as  respects  the  amount  or  the  property  upon  which  it  is  imposed." 
['atton  t'.  Brady,  184  IJ.  S.  COS;  McCray  r.  llnited  States,  195  U.  S.  27,  58, 
and  previous  cases  in  this  court  there  cited. 

Nor  is  that  line  of  cases  applicable,  such  as  Brown  v.  Maryland,  12  Wheat. 
410,  holding  that  a  tax  on  the  sales  of  an  importer  is  a  tax  on  the  import, 
and  Cook  r.  Pennsylvania,  97  l^.  S.  511(5,  holding  a  tax  on  auctioneer's  sales 
of  goods  in  original  packages  a  tax  on  imports.  In  these  cases  the  tax  was 
held  invalid,  as  the  State  thereby  taxed  subjects  of  taxation  within  the  exclu- 
sive power  of  Congress. 

What  w«'  have  said  as  to  tlic  power  of  Congress  to  lay  this  excise  tax  dis- 
poses of  the  conti'iit  idii  that  the  act  is  void  as  lacking  in  (hio  process  of  law. 

It  is  urged  that  this  power  can  be  so  exercised  by  Congress  as  to  practically 
destroy  the  right  of  the  States  to  create  corporations,  and  for  that  reason  it 
ought  not  to  !)c  sustained,  and  rcfiTcncc  is  inndc  to  tlie  declaration  of  Chief 
Justice  Marshall  in  McCulloch  r.  Maryland  th;it  tlie  power  to  tax  involves  the 
power  to  destroy.  This  argument  lii;s  not  been  infrequently  addressed  ti 
this  court  with  respeet  to  the  exercise  of  tlie  pow<'rs  of  Congress.  Of  such 
cont<'nti<iii   tliis  court  sriid   in    Kiiowlton    v.   Moore,  supra: 

"This  prineiph'  is  pcrtimMit  only  wlicn  there  is  no  power  to  tax  a  pnrtirula" 
subject,  iind  has  no  relation  to  a  case  where  sucli  right  exists.  In  other 
words,  til''  pf)Wer  to  destroy  which  may  be  the  conse(|neiic(>  of  taxiitioii  is  a 
rcnson  w)iv  the  riglit   to  tax  should  lie  cotitined  to  sul)jects  which  may  be  hiw- 


Constitutionality  of  tiih  Tax.  3 


<j « 


fully  embraced  tlwirein,  even  altliough  it  liappcns  that  in  some  particular 
instance  no  great  harm  may  be  caused  by  the  exercise  of  the  taxing  aulliority 
as  to  a  subject  which  is  beyond  its  scope.  But  this  reasoning  has  no  appli- 
cation to  a  lawful  tax,  for  if  it  had  there  would  be  an  end  of  all  taxation- 
that  is  to  say,  if  a  lawful  tax  can  be  defeated  because  the  power  which  is  mani- 
fested by  its  imposition  may  wlien  further  exercised  be  destructive,  it  would 
follow  that  every  lawful  tax  would  become  unlawful,  and  therefore  no  taxation 
whatever  could  be  levied." 

In  Veazie  Bank  v.  Fenno,  8  Wall.  533,  supra,  sjKiaking  for  the  court,  the 
chief  justice  said: 

"  It  is  insisted,  however,  that  the  tax  in  the  case  before  us  is  excessive,  and 
so  excessive  as  to  indicate  a  purpose  on  the  part  of  Congress  to  destroy  the 
franchise  of  the  bank,  and  is,  therefore,  beyond  the  constitutional  power  of 
Congress. 

"  The  first  answer  to  this  is  that  the  judicial  cannot  prescribe  to  the  legis 
lative  department  of  the  government  limitations  upon  the  exercise  of  its 
acknowledged  powers.  Tlie  power  to  tax  may  be  exercised  oppressively  upon 
persons,  but  the  responsibility  of  the  legislature  is  not  to  the  courts,  but  to 
the  people  by  whom  its  members  are  elected.  So  if  a  particular  tax  bears 
heavily  upon  a  corporation,  or  a  class  of  corporations,  it  cannot,  for  that 
reason  only,  be  pronounced  contrary  to  the  Constitution." 

To  the  same  effect,  McCray  v.  United  States,  195  U.  S.  27.  In  the  latter 
case  it  was  said: 

"  *  *  *  no  instance  is  afforded  from  the  foundation  of  the  government 
where  an  act,  which  was  within  a  power  conferred,  was  declared  to  be  repug- 
nant to  the  Constitution,  because  it  appeared  to  the  judicial  mind  that  the 
particular  exertion  of  constitutional  power  was  either  unwise  or  unjust." 

And  in  the  same  case  this  court  said,  after  reviewing  the  previous  cases  in 
this  court: 

"  Since,  as  pointed  out  in  all  the  decisions  referred  to,  the  taxing  power 
conferred  by  the  Constitution  knows  no  limits  except  those  expressly  stated  in 
that  instrument,  it  must  follow,  if  a  tax  be  within  the  lawful  power,  the 
exertion  of  that  power  may  be  not  judicially  restrained  because'  of  the  result-j 
to  arise  from  its  exercise." 

The  argument,  at  last,  comes  to  this:  That  because  of  possible  results,  a 
power  lawfully  exercised  may  work  disastrously,  therefore  the  courts  must 
interfere  to  prevent  its  exercise,  because  of  the  consequences  feared.  No  such 
authority  has  ever  been  invested  in  any  court.  The  remedy  for  such  wrongs, 
if  such  in  fact  exist,  is  in  the  ability  of  the  people  to  choose  their  own  repre- 
sentatives, and  not  in  the  exertion  of  unwarranted  powers  by  courts  of  justice. 

It  is  especially  objected  that  certain  of  the  corporations  whose  stockholders 
challenge  the  validity  of  the  tax,  are  so-called  real  estate  companies,  whose 
business  is  principally  the  holding  and  management  of  real  estate.  These 
cases  are  No.  415,  Cedar  Street  Co.  v.  Park  Realty  Co.;  No.  431,  Percy  IT. 
Brundage  r.  Broadway  Pealty  Co.;  No.  443.  Pliillips  ?•.  Fifty  Associates  rt  nl.; 
No.  44G,  Mitchell  r.  Clark  Iron  Co.;  No.  412,  William  IT.  Miner  r.  Corn  Ex- 
change Bank  et  ah;  and  No.  457,  Cook  et  al.  i\  Boston  Wharf  Co. 

In  No.  412,  Miner  v.  Corn  Exchange  Bank  et  al.,  the  bank  occupies  a  build- 
ing in  part  and  rents  a  large  part  to  tenants. 


38  Federal  Corporation  Tax  Law. 

Of  the  realty  companies,  the  Park  Realty  Company  was  organized  to  "  work^ 
devL'lop,  sell,  convey,  mortgage,  or  otherwise  dispose  of  real  estate;  to  lease, 
exchange,  hire,  or  otherwise  acquire  property;  to  erect,  alter,  or  improve 
buildings;  to  conduct,  operate,  manage,  or  lease  hotels,  apartment  houses, 
etc. ;  to  make  and  carry  out  contracts  in  the  manner  specilied  concerning 
buildings  ♦  ♦  •  and  generally  to  deal  in,  sell,  lease,  exchange,  or  other- 
wise deal  with  lands,  buildings,  and  other  property,  real  or  personal,"  etc. 

At  the  time  the  bill  was  filed  the  business  of  the  company  related  to  the 
Hotel  Leonori,  and  the  bill  averred  that  it  was  engaged  in  no  other  buisinesa 
except  the  management  and   leasing  of  that   hotel. 

The  Broadway  Realty  Company  was  formed  for  the  purpose  of  owning, 
holding,  and  managing  real  estate.  It  owns  an  ofBce  building  and  certain 
securities.  The  olJIice  building  is  let  to  tenants,  to  whom  light  and  heat  are 
furnished,  and  for  whom  janitor  service  and  similar  service  are  performed. 

The  Fifty  Associates  are  operating  under  a  charter  to  own  real  estate  with 
power  to  build,  improve,  alter,  pull  down,  and  rebuild,  and  to  manage, 
exchange,  and  dispose  of  the  same. 

The  Clark  Iron  Company  was  organized  under  the  laws  of  Minnesota,  owns 
and  leases  ore  lands  for  the  purpose  of  carrying  on  mining  operations,  and 
receives  a  royalty  depending  upon  the  quantity  of  ore  mined. 

The  Boston  \Miarf  Company  is  operating  under  a  chaitor  authorizing  it  t» 
acquire  lands  and  flats,  with  their  privileges  and  appurtenances,  and  to  lease, 
manage,  and  improve  its  property  in  whatever  manner  shall  be  deemed  ex- 
pedient by  it,  and  to  receive  dockage  and  wharfage  for  vessels  laid  at  its 
wharfs. 

What  we  have  said  as  to  the  character  of  the  corporation  tax  as  an  exciao 
disposes  of  the  contention  that  it  is  direct,  and  therefore  requiring  apportion- 
ment by  the  Constitution.  It  remains  to  consider  whether  these  corporations 
are  engage:!  in  biisinoss.  "Business'"  is  a  very  comprehensive  term  and  em- 
brac<'8  everything  about  which  a  person  can  be  employed.  Black's  Law  Diet. 
158,  citing  People  v.  Commissioners  of  Taxes,  23  N.  Y.  242,  244.  "  That  which 
occupies  the  time,  attention,  and  labor  of  men  for  the  purpose  of  a  livelihood 
or  profit. "     Bouvier's  T>aw  Diet.,  vol.  1,  p.  273. 

We  think  it  is  clear  that  corporations  organized  for  the  purpose  of  doing 
businesR,  and  actually  engaged  in  such  activities  as  leasing  property,  collectinpf 
rents,  managing  office  buildings,  making  investments  of  profits,  or  leasing  ore 
lands  and  collootiiig  royaIti<'s.  managing  wharves,  dividing  profits,  and  in 
8<')me  cases  investing  the  siiry)his,  an-  engaged  in  busiiu'ss  within  tlic  meaning 
of  this  statute,  and  in  the  capacity  necessary  to  make  such  organizations 
subject  to  the  law. 

Of  the  Motor  Taximeter  Cab  Company  case.  No.  4.'?2,  the  company  owns  and 
lenses  taxic.ibs,  an<I  rollerts  rents  Uierefrotn.  We  think  it  is  also  doing  busi- 
nesH  within  the  nx-aning  of  the  statute. 

Wh.nt  we  have  already  said  disposes  of  the  objerduns  made  in  certain  rases 
of  life  insurance  and  triiMf  companies,  and  banks,  as  to  income  derived  from 
T'iiit<-d   St.'ifen,   S(:if<',   i)niniei|ia1,  or  oflier  noiifji  xnble  lionds. 

We  rnnie  to  flic  (|iii'Mt  imi.  Are  so  culled  |iiiMic  service  corporations,  siieh  as 
the  Coney  Island  and  Brooklvn  Rnilrond  Conipnin'.  in  case  No.  409,  and  the 
Tnti'rlKproiiph   Rapid  Transit  Cf)mpany,   No.  442,  exempted  from   the  operation 


Constitutionality  of  the  Tax.  39 

of  this  statute?  In  the  case  of  South  Carolina  v.  United  States,  199  U.  S. 
437,  this  court  held  that  when  a  State,  acting  within  its  lawful  authority, 
undertook  to  carry  on  the  liquor  business  it  did  not  withdraw  the  agencies 
of  the  State  carrying  on  tlie  trallic  from  the  operation  of  the  internal  nevenue 
laws  of  the  United  States.  If  a  State  may  not  thus  witiulraw  from  tlie  opera- 
tion of  a  federal  taxing  law  a  subject-matter  of  such  taxation,  it  is  difficult 
to  see  how  the  incorporation  of  companies  whose  service,  though  of  a  public 
nature,  is,  nevertheless,  with  a  view  to  private  profit,  can  have  the  effect  of 
denying  the  federal  right  to  reach  such  properties  and  activities  for  the  pur- 
poses of  revenue. 

It  is  no  part  of  the  essential  governmental  functions  of  a  State  to  provide 
means  of  transportation,  supply  artificial  light,  water,  and  the  like.  Thes> 
objects  are  often  accomplished  through  the  medium  of  private  corporations, 
and,  though  the  public  may  derive  a  benefit  from  such  operations,  the  com- 
panies carrying  on  such  enterprises  are,  nevertheless,  private  companies,  whose 
business  is  prosecuted  for  private  emolument  and  advantage.  For  the  pur- 
pose of  taxation  they  stand  upon  the  same  footing  as  other  private  corpora- 
tions upon  which  special  franchises  have  been  conferred. 

The  true  distinction  is  between  the  attempted  taxation  of  those  operations 
of  the  States  essential  to  the  execution  of  its  governmental  functions,  and 
which  the  State  can  only  do  itself,  and  those  activities  which  are  of  a  private 
character.  Tlie  former  the  United  States  may  not  interfere  with  by  taxing 
the  agencies  of  the  State  in  fiarrying  out  its  purposes;  the  latter,  although 
regulated  by  the  State,  and  exercising  delegated  authority,  such  as  the  right 
of  eminent  domain,  are  not  removed  from  the  field  of  legitimate  federal 
taxation. 

Applying  this  principle,  we  are  of  opinion  that  the  so-called  public  service 
corporations,  represented  in  the  cases  at  bar,  are  not  exempt  from  the  tax  in 
question.     Eailroad  Co.  v.  Peniston,  18  Wall.  5,  33. 

It  is  again  objected  that  incomes  under  $5,000  are  exempted  from  the  tax. 
It  is  only  necessary,  in  this  connection,  to  refer  to  Knowlton  v.  Moore,  178 
U.  S.,  supra,  in  which  a  tax  upon  inheritances  in  excess  of  $10,000  was  sus- 
tained. In  Magoun  v.  Illinois  Trust  &  Savings  Bank,  170  U.  S.  283,  293,  a. 
graded  inheritance  tax  was  sustained. 

As  to  the  objections  that  certain  organizations,  labor,  agricultural  and 
horticultural,  fraternal  and  benevolent  societies,  loan  and  building  associa- 
tions, and  those  for  religious,  charitable,  or  educational  purposes,  are  excepted 
from  the  operation  of  the  law,  we  find  nothing  in  them  to  invalidate  the  tax. 
As  we  have  had  frequent  occasion  to  say,  the  decisions  of  this  court  from  an 
early  date  to  the  present  time  have  emphasized  the  right  of  Congress  to  select 
the  objects  of  excise  taxation,  and  within  this  power  to  tax  some  and  leave 
others  untaxed,  must  be  included  the  right  to  make  exemptions  such  as  are 
found  in  this  act. 

Again,  it  is  urged  that  Congress  exceeded  its  power  in  permitting  a  deduc- 
tion to  be  made  of  interest  payments  only  in  case  of  interest  paid  by  banks 
and  trust  companies  on  deposits,  and  interest  actually  paid  within  the  year 
on  its  bonded  or  other  indebtedness  to  an  amount  of  such  bonded  and  other 
indobtedness  not  exceeding  the  paid-up  capital  stock  of  the  corporation  or 
company.     This   provision   may   have  been   inserted   with  a   view   to   prevent 


40  Fex>eiial  Corporation  Tax  Law. 

corporations  from  issuing  a  large  amount  of  bonds  in  excess  of  the  paid-up 
capital  stock,  and  thereby  distributing  profits  so  as  to  avoid  the  tax.  In  any 
event,  we  see  no  reason  why  this  method  of  ascertaining  the  deductions  allowed 
should  invalidate  the  act.  Such  details  are  not  wholly  arbitrary,  and  werd 
deemed  essential  to  practical  operation.  Courts  cannot  substitute  their  judg- 
ment for  that  of  the  legislature.  In  such  matters  a  wide  range  of  discretion 
is  allowed. 

The  argument  that  different  corporations  are  so  differently  circumstanced 
in  different  States,  and  the  operation  of  the  law  so  unequal  as  to  destroy  it. 
is  so  fully  met  in  the  opinion  in  Knowlton  v.  Moore,  178  U.  S.,  supra,  that  it 
is  only  necessary  to  make  reference  thereto.  For  this  purpose  the  law  operates 
uniformly,  geographically  considered,  throughout  the  United  States,  and  in 
the  same  way  wherever  the  subject-matter  is  found.  A  liquor  tax  is  not  ren- 
dered unlawful  as  a  revenue  measure  because  it  may  yield  nothing  in  those 
States  which  have  proliibited  the  liquor  traffic.  No  more  is  the  present  law 
unconstitutional  because  of  inequality  of  operation  owing  to  different  local 
conditions. 

Nor  is  the  special  objection  tenable,  made  in  some  of  the  cases,  that  the 
corporations  act  as  trustees,  guardians,  etc.,  under  the  authority  of  the  laws 
or  courts  of  the  State.  Such  trustees  are  not  the  agents  of  the  State  govern- 
ment in  a  sense  which  exempts  them  from  taxation  because  executing  the 
necessary  governmental  powers  of  the  State.  The  trustees  receive  their  com 
pensation  from  the  interests  served,  and  not  from  the  public  revenues  of  the 
State. 

It  is  urged  in  a  number  of  the  cases  that  in  a  certain  feature  of  the  statute 
there  is  a  violation  of  the  Fourth  Amendment  of  the  Constitution,  protecting 
against  unreasonable  searches  and  seizures.  This  amendment  was  adopted 
to  protect  against  abuses  in  judicial  procedure  under  the  guise  of  law  which 
invade  the  privacy  of  persons  in  their  homes,  papers,  and  effects,  and  applies 
to  criminal  prosecutions  and  suits  for  penalties  and  forfeitures  under  the 
revenue  laws.  Boyd  v.  United  States,  116  U.  S.  632.  It  does  not  prevent  the 
issue  of  search  warrants  for  the  seizure  of  gambling  parajjliernalia  and  other 
illegal  matter.  Adams  r.  New  York,  192  N.  Y.  585.  It  does  not  prevent  the 
issuing  of  process  to  require  attendance  and  testimony  of  witnesses,  the  pro- 
duction of  books  and  papers,  etc.  Interstate  Commerce  Commission  r.  Brim- 
son,  154  U.  S.  447;  Interstate  Commerce  Commission  r.  Baird,  104  IT.  S.  25. 
Certainly  the  amendment  was  not  intended  to  i)revcnt  tlie  ordinary  procedure 
in  use  in  many,  perhaps  most,  of  the  States  of  requiring  tax  returns  to  be 
made,  ofli'ii  iiiidtT  oatli.  'i"h<'  objection  in  this  coinnTtioii  applies,  when  the 
HubHtanr<'  of  (he  argument  is  reaclH'<l,  to  Ww  sixtli  section  of  the  act,  which 
provides : 

"  Sixth.  When  the  assessment  sliall  be  made,  ns  provided  in  tliis  section, 
tlic  returns,  together  with  aiiv  rorreetioiis  IlKTrof  wliich  may  have  been  made 
l)y  tlie  commissioner,  shall  be  filed  in  flie  ofTice  of  the  Commissioner  of  Tnfornal 
Revenue  and  sliall  cnnHtitutc  public  records  nTid  l)e  open  to  inspection  as  such." 

An  nmendnient  was  made  Juni'   17.   1010.  which   reads  ns   follows: 

"For  cla-isifying,  indexing,  exhibitin'/.  .'tnd  juoporly  earinir  for  the  returns 
of  all  eoriiorations,  required  by  seel  ion  thirty  eit'lif  of  an  act  entitled  'An  Act 
to    providi-    revenue,    cf|uali/r    duties,   encourage    (he    imlustries   of   the   T^nited 


CONSTITL' 1  JuNAi.ITV    OF    Till!]    TaX.  41 

States,  and  for  othcir  pui  poses,'  approved  August  fifth,  iiinoteen  hundred  and 
nine,  including  the  employment  in  the  District  of  Columbia,  of  such  clerical 
and  other  personal  services  and  for  rent  of  such  quarters  as  may  be  necessary, 
twenty-five  thousand  dollars:  Provided,  That  any  and  all  such  returns  shall 
be  open  to  inspection  only  upon  the  order  of  the  President  under  rules  and 
regulations  to  be  prescribed  by  tlie  Secretary  of  the  Treasury  and  approved 
by  the  President." 

The  contention  is  that  the  above  section  as  originally  framed  and  as  now 
amended  could  have  no  legitimate  connection  with  the  collection  of  the  tax. 
and  in  substance  amounts  to  no  more  than  an  unlawful  attempt  to  exhibit  the 
private  affairs  of  corporations  to  public  or  private  inspection,  without  any 
substantial  connection  with  or  legitimate  purpose  to  be  subserved  in  the  col- 
lection of  the  tax  under  the  act  now  under  consideration.  But  we  cannot 
agree  to  this  contention.  The  taxation  being,  as  we  have  held,  within  the 
legitimate  powers  of  Congress,  it  is  for  that  body  to  determine  what  means 
are  appropriate  and  adapted  to  the  purposes  of  making  the  law  effectual. 
In  this  connection  the  often  quoted  declaration  of  Chief  Justice  Marshall,  in 
McCulloch  V.  Maryland,  4  Wheat.  316,  421,  is  appropriate:  "Let  the  end  be 
legitimate,  let  it  be  within  the  scope  of  the  Constitution,  and  all  means  which 
are  appropriate,  and  which  are  plainly  adapted  to  that  end,  and  which  are 
not  prohibited,  but  are  consistent  with  the  letter  and  spirit  of  the  Constitution, 
are  constitutional." 

Congress  may  have  deemed  the  public  inspection  of  such  returns  a  mean? 
of  more  properly  securing  the  fulness  and  accuracy  thereof.  In  many  of  the 
States  laws  are  to  be  found  making  tax  returns  public  documents,  and  open 
to  inspection. 

In  Connecticut,  the  requirement  is  that  the  tax  lists  of  the  assessors  shall 
be  abstracted  and  lodged  in  the  town  clerk's  oiUce  "  for  public  inspection." 
B,  S.,  Conn.,  §  2310.  In  New  York,  notices  of  the  completion  of  the  assess- 
ment rolls  must  be  conspicuously  posted  in  three  or  more  public  places,  and 
a  copy  left  in  a  specified  place,  "  where  it  may  be  seen  and  examined  by  any 
person  until  the  third  Tuesday  of  August  next  following."  Consol.  Laws  of 
N.  Y.,  vol.  5,  p.  5859;  Laws  N.  Y.,  1909,  c.  62,  §  36.  In  Maryland,  a  record 
of  property  assessed  is  required  to  be  kept,  and  the  valuation  thereof  with 
alphabetical  list  of  owners  recorded  in  a  book,  "  which  any  person  may  inspect 
without  fee  or  reward."  Pub.  Laws  Md.,  vol.  2,  p.  1804,  §  23.  In  Pennsyl- 
vania, it  is  provided  that  from  the  time  of  publishing  the  assessor's  returns 
until  the  day  appointed  for  finally  determining  whether  the  assessor's  valua- 
tions are  too  low,  "  any  taxable  inhabitant  of  the  county  shall  have  the  right 
to  examine  the  said  return  in  the  commissioner's  office."  Pepper  &  Lewis* 
Dig.  Laws  Pa.,  vol.  2,  p.  4591,  §  357.  In  New  Hampshire,  the  list  of  taxes 
assessed  are  required  to  be  kept  in  a  book,  and  also  left  with  the  town  clerk, 
and  such  records  "  shall  be  open  to  the  inspection  of  all  persons."  Pub.  Stat. 
N.  H.,  1901,  p.  214.  §  5. 

We  cannot  say  that  this  feature  of  the  law  does  violence  to  the  constitu- 
tional protection  of  the  Fourth  Amendment,  and.  this  is  equally  true  of  the 
Fifth  Amendment,  protecting  persons  against  compulsory  self-incriminating 
testimony.  No  question  under  the  latter  amendment  properly  arises  in  these 
cases,  and  when  circumstances  are  presented  which  invoke  the  protection  of 


42  FedEvRal  Corporation^  Tax  Law. 

that  amendment  and  raise  questions  involving  rights  thereby  secured  it  will 
be  lime  enough  to  decide  them.  And  so  of  the  argument  that  the  penalties 
for  the  nonpayment  of  the  taxes  are  so  high  as  to  violate  the  Constitution. 
No  case  is  presented  involving  that  question,  and,  moreover,  the  penalties  are 
clearly  a  separate  part  of  the  act,  and  whether  collectible  or  not  may  be  deter- 
mined in  a  case  involving  an  attempt  to  enforce  them.  Wilcox  v.  Consoli- 
dated Gas  Co.,  212  U.  S.  19,  53. 

It  has  been  suggested  that  there  is  a  lack  of  power  to  tax  foreign  corpo- 
rations, doing  local  business  in  a  State,  in  the  manner  proposed  in  this  act, 
and  that  the  tax  upon  such  corporations,  being  unconstitutional,  works  such 
inequality  against  domestic  corporations  as  to  invalidate  the  law.  It  is  suffi- 
cient to  say  of  this  that  no  such  case  is  presented  in  the  record.  Southern 
Ry.  Co.  r.  King,  217  U.  S.  525.  This  is  equally  true  as  to  the  alleged  in- 
validitj'  of  the  act  as  a  tax  on  exports,  which  is  beyond  the  power  of  Congress. 
No  such  case  is  presented  in  those  now  before  the  court. 

We  have  noticed  such  objections  as  are  made  to  the  constitutionality  of  this 
law  as  it  is  deemed  necessary  to  consider.  Finding  the  statute  to  be  within 
the  constitutional  power  of  the  Congress,  it  follows  that  the  judgments  in  the 
seA'eral  cases  must  be  affirmed. 

Affirmed. 


CONSTKUCTION    AND    Iw TK,BPKiiTAT10N    OF    TUB    AcT.  43 


CHAPTER  III. 

CONSTRUCTION  AND  INTERPRETATION  OF  THE  ACT. 

Sec.  14.  Construction  and  Interpretation  of  the  Act. — 
Rules  therefor.  Matters  of  construction  and  interpretation  are 
of  the  highest  import  in  the  preparation  of  a  treatise  on  the  Fed- 
eral Corporation  Tax  Enactment.  For  the  benefit  of  those  mem- 
bers of  the  bench  and  bar  who  may  be  called  upon  to  either  con- 
strue or  interpret  or  assist  in  the  construction  and  interpretation 
of  the  various  provisions  of  the  federal  corporation  tax,  certain 
pertinent  rules  of  statutory  construction  and  interpretation  are 
herewith  submitted : 

Sec.  15.  Rules  for  the  Construction  and  Interpretation  of 
the  Federal  Corporation  Tax  Act.  — 

1.  Expressio  unius  est  exclusio  alterius  is  an  universal  maxim 
in  the  construction  of  statutes.  U.  S.  v.  Arredondo  et  al.,  6  Peters 
691,  8  L.  E.  547. 

2.  The  elementary  rule  is  that  every  reasonable  construction 
must  be  resorted  to  in  order  to  save  a  statute  from  unconstitution- 
ality. Hooper  v.  California,  155  U.  S.  648,  15  Sup.  Ct.  Rep. 
207,  39  L.  E.  297. 

3.  Where  the  language  of  an  act  will  bear  two  interpretations 
equally  obvious,  that  one  which  is  clearly  in  accordance  with  the 
provisions  of  the  Constitution  is  to  be  preferred.  Knights  Tem- 
plar &  M.  L.  Ind.  Co.  V.  Jarman,  187  U.  S.  197,  23  Sup.  Ct.  Rep. 
108,  47  L.  E.  139. 

4.  Every  act  of  Congress  is  to  be  given  effect  if  possible  ut  res 
nmgis  valeat  quam  pereat.  Unity  v.  Burragem,  103  U.  S.  447, 
26  L.  E.  405. 

5.  General  language  used  in  a  statute  should  receive  such  a 
limited  construction  as  will  accord  with  the  legislative  intention 


44  FedevRAl  Corporation  Tax  Law. 

as  gathered   from   the  provisions   of  the  whole   act.      McKee  v. 
United  States,  164  IT.  S.  287,  IT  Sup.  Ct.  Rep.  92,  41  L.  E.  437. 

6.  Whenever  any  words  of  the  statute  are  doubtful  or  obscure, 
the  intention  of  the  legislature  is  to  be  resorted  to  in  order  to  find 
the  meaning  of  the  words.  U.  S.  v.  Freeman,  3  How.  556,  11 
L.  E.  724. 

7.  The  general  rule  of  statutory  construction  is  that  the  intent 
of  the  lawmaker  is  to  be  found  in  the  language  that  he  has  used ; 
and  that  language  is  always  controlling  unless  there  are  cogent 
reasons  for  believing  that  the  language  does  not  fully  and  accu- 
rately disclose  the  intent.  U.  S.  v.  Goldenberg,  168  U.  S,  95,  18 
Sup.  Ct.  Rep.  3,  42  L.  E.  394. 

8.  Where  a  statutory  provision  admits  of  more  than  one  con- 
struction, that  one  will  be  preferred  which  best  serves  to  carry  out 
the  purposes  of  the  act.  Bernier  v.  Bemier,  147  U.  S.  242,  13 
Sup.  Ct.  Rep.  437,  37  L.  E.  152. 

9.  A  law  is  the  best  expositor  of  itself,  and  every  part  of  an 
act  is  to  be  taken  into  view  for  the  purpose  of  discovering  the 
mind  of  the  legislature.  Pennington  v.  Coxe,  2  Cranch  33,  2 
L.  E.  199. 

10.  Statutes  should  be  interpreted  according  to  the  intent  and 
meaning  of  the  legislature.  New  Lamp  Chimney  Co.  v.  Ansonia 
Brass  &  Copper  Co.,  91  U.  S.  656,  23  L.  E.  336. 

11.  The  meaning  of  the  legislature  may  be  extended  beyond  the 
precise  words  used  in  the  law  from  the  reason  or  motive  u]X)n 
which  the  legishiture  proceeded  from  the  end  in  view  of  the  pur- 
pose which  was  desired ;  the  limitation  of  the  rule  being,  that  to 
extend  the  meaning  to  any  case  it  must  be  shown  to  come  within 
the  same  reason  u])on  which  the  lawmakers  proceeded,  and  not 
merely  a  like  reason,  U.  S.  v.  Freeman,  3  Tlow.  556,  11  Sup.  Ct. 
724. 

12.  The  operation  of  a  statute  may  bo  restrained  within  nar- 
rower limits  than  its  words  import  where  the  court  is  satisfied  tliat 
the  literal  meaning  of  its  language  would  oxtond  to  cases  which 
the  legislatiirf  never  designed  (o  include  in  it.  Brewer  v.  Blougher 
etai.  14  I^eters  178,  10  L  K.  408. 

!.">.  The  rnle  is  that,  a  statnte  should  be  so  construed  that  if 
possible,  no  clause,  sentence  or  word  should  1k'  superfluous,  void  or 


CONSTRUCTTON    AND    INTERPRETATION    OF    THE    AcT.  45 

insignificant.     Montclair  Township  r.  Ramsdell,  107  U.  S.  147, 
2  U.  S.  Sup.  Ct.  Rep.  391,  27  L.  E.  431. 

14.  Effect  should  be  given  to  all  the  words  of  the  statute  where 
that  is  possible  without  conflict.  Wilmot  v.  Mudge,  103  U.  S. 
217,  26  L.  E.  536. 

15.  All  general  terms  in  a  statute  should  be  limited  in  their 
application  so  as  not  to  lead  to  injustice,  oppression  or  any  imcon- 
stitutional  operation,  if  that  be  possible.  Carlisle  v.  U.  S.,  16 
Wall.  147,  21  L.  E.  426. 

16.  All  laws  should  receive  a  sensible  construction.  General 
terms  should  be  so  limited  in  their  operation  as  not  to  lead  to 
injustice,  oppression  or  an  absurd  consequence.  It  will  always 
therefore  be  presumed  that  the  legislature  intended  exceptions  to 
its  language,  which  would  avoid  results  of  this  character.  The 
reason  of  the  law  in  such  cases  should  prevail  over  its  letter. 
U.  S.  v.  Kirby,  7  Wall.  482,  19  L.  E.  278. 

17.  In  construing  a  statute  general  expressions  will  not  be 
restrained  by  particular  words  where  the  distinct  import  of  a 
sentence  describing  an  entire  class  would  thereby  be  useless. 
Adams  v.  Woods,  2  Cranch  336,  2  L.  E.  297. 

18.  Where  the  language  of  a  statute  is  clear,  it  is  not  for  the 
court  to  say  that  it  shall  be  so  construed  as  to  include  cases,  be- 
cause no  good  reason  can  be  assigned  why  such  cases  should  be 
excluded  from  its  provision.  Denn  v.  Reid,  10  Peters  524,  9 
L.  E.  519. 

19.  Revenue  statutes  are  to  be  construed  liberally  to  carry  out 
the  purposes  of  their  enactment.  U.  S.  v.  Hodson,  10  Wall.  395, 
19  L.  E.  937 ;  Smythe  v.  Fisk,  23  Wall.  374,  23  L.  E.  47. 

20.  An  exemption  from  taxation  must  be  clearly  defined  and 
founded  upon  clear  language  without  doubt  or  ambiguity.  Bank 
of  Commerce  v.  Tennessee,  161  TJ.  S.  134,  16  Sup.  Ct.  Rep.  456, 
50  L.  E.  645. 

21.  The  taxing  power  of  the  State  is  never  to  be  presumed  to 
be  relinquished  and  it  exists  unless  the  intention  to  relinquish  is 
declared  in  clear  and  unambiguous  terms  which  will  admit  of  no 
other  reasonable  construction.  S.  W.  R.  C.  Co.  v.  Wright,  116 
U.  S.  231,  6  Sup.  Ct.  Rep.  375,  29  L.  E.  627. 

22.  Exemption  from  taxation  is  not  favored  by  law  and  will 


46  Federal  Corporation  Tax  Law. 

not  bo  sustained  unless  such  clearly  appeared  to  have  been  the 
intent  of  the  legislature;  and  every  reasonable  doubt  should  be 
resolved  in  favor  of  the  taxing  power.    Y.  &  M.  Ky.  Co.  v.  Adams, 

ISO  r.  S.  1. 

23.  Penal  provision  of  revenue  statutes  are  not  to  be  strictly 
construed.     Smythe  r.  Fiske,  23  Wall.  374,  23  L.  E.  47. 

24.  The  meaning  of  general  words  in  a  statute  must  be  re- 
stricted whenever  it  is  found  necessary  to  do  so  in  order  to  carry 
out  the  legislative  intention.  Reiche  v.  Smythe,  13  Wall.  162, 
20  L.  E.  566. 

25.  A  statute  is  to  be  interpreted  according  to  the  intent  of  the 
legislature  apparent  upon  its  face;  and  every  technical  rule  as  to 
the  construction  or  force  of  particular  terms  must  yield  to  the  clear 
expression  of  the  paramount  will  of  the  legislature.  U.  S.  v. 
Freeman,  3  How.  556,  11  L.  E.  724. 

26.  To  render  the  title  of  an  act  of  any  avail  in  its  construc- 
tion, the  language  of  the  act  must  be  doubtful  or  ambiguous  and 
the  ambiguity  must  be  in  the  context  and  not  in  the  title.  U.  S. 
V.  O.  &  C.  Ry.  Co.,  164,  U.  S.  526,  17  Sup.  Ct.  Rep.  165,  41  L.  E. 
541.  The  heading  to  a  section  of  a  statute  is  proper  to  be  con- 
sidered in  interpreting  the  statute  when  an  ambiguity  exists  and  a 
literal  interpretation  will  work  out  wrong  or  injury.  Knowlton 
V.  Moore,  17  U.  S.  41,  20  Sup.  Ct.  Tie]).  747,  44  L.  E.  969. 

27.  Tlio  rules  of  construction  belonging  to  the  English  com- 
mon law  arc  adopted  and  adliercd  to  bv  tlie  federal  courts  in 
determining  the  meaning  of  the  federal  statutes,  (^harles  River 
Bridge  v.  Warren  P.ridge,  11  Peters  420,  9  P.  E.  773. 

2S.  Statutes  should  be  construed  so  as  not  to  give  effect  to  all 
tlie  words  used  iii  their  ordinary  sense;  but  also  to  eviscerate,  if 
possible,  their  true  s})irit  and  intent  from  all  the  connected  circum- 
stances, attendant  or  subsequent  as  well  as  preceding.  Lawrence 
V.  All(>n,  7  How.  785. 

29.  In  construing  a  statute  every  clause  should  be  expounded 
by  reference  to  every  other,  and  if  possible,  every  clause  and 
provision  should  Ih'  given  iind  liave  the  effect  contem])lated  by 
the  legislatUH'.  One  pf)rtion  of  a  statute  should  not  be  con- 
strued to  annul  or  destroy  wluit  has  ])een  clearly  granted  by 
another.     The  mo«t  general  and  absolute  terms  of  one  section  may 


Construction  and  Interpretation  ok  the  Act.        4.7 

"be  qualified  and  limited  by  the  conditions  and  exceptions  cou- 
tained  in  another,  so  that  all  may  stand  together.  Peck  v.  Jewess, 
7  How.  612,  12  L.  E.  841. 

30.  The  spirit  as  well  as  the  letter  of  a  statute  must  be  re- 
spected ;  and  where  the  whole  context  of  the  law  demonstrates  the 
particular  intent  in  the  legislature  to  effect  a  certain  object,  some 
degree  of  implication  may  be  called  in  to  aid  the  intent.  Dorous- 
seau  V.  U.  S.,  6  Cranch  307,  3  L.  E.  232. 

31.  Where  exceptions  are  provided  in  a  general  statute,  il 
excludes  all  others  than  those  expressed,  and  the  courts  are  not  at 
liberty  to  engraft  upon  such  statute  other  exceptions  than  those 
expressed.  Kendall  v.  U.  S.,  107  U.  S.  123,  2  Sup.  Ct.  Rep.  277, 
27  L.  E.  437. 

32.  The  statute  may  define  the  purjwse  of  an  enactment  as  well 
by  using  a  term  of  known  and  determined  meaning  as  by  expressed 
enumeration  of  all  the  particulars  including  that  term.  U.  S. 
V.  Smith,  5  Wlieat.  153,  5  L.  E.  57. 

33.  The  popular  or  current  import  of  words  furnish  the  gen- 
eral rule  for  the  interpretation  of  public  laws  as  well  as  of  private 
and  business  transactions.  Maillard  v.  Lawrence,  16  How.  251, 
14  L.  E.  925. 

34.  Where  words  in  a  statute  have  acquired  a  well-understood 
meaning  through  judicial  interpretation,  it  is  to  be  presumed  that 
they  were  used  in  that  sense  in  a  subsequent  statute  on  the  same 
subject,  unless  the  contrary  appears.  U.  S.  v.  Mooney,  116  U.  S. 
106,  6  Sup.  Ct.  Eep.  304,  29  L.  E.  550. 

35.  It  is  not  competent  to  reject  or  disregard  a  material  part 
of  an  Act  of  Congress  unless  it  be  so  clearly  repugnant  to  the 
residue  of  the  act  that  the  whole  cannot  stand  together.  Eice  v. 
Minn.  &  N^.  W.  R.  R.  Co.,  1  Black  358,  17  L.  E.  147. 

36.  Where  a  provision  is  left  out  of  a  statute  either  by  design 
or  mistake  of  Congress,  the  courts  have  no  power  to  supply  it.  To 
do  so  would  be  to  legislate  and  not  to  construe.  Hobbs  v.  McLean, 
117  U.  S.  567,  6  Sup.  Ct.  Rep.  870,  29  L.  E.  940. 

37.  The  statute  should  be  read  according  to  the  natural  and 
obvious  import  of  its  language,  without  resort  to  settled  and 
forced  construction  for  the  purpose  of  either  limiting  or  extcndinir 
its  operation;  and  when  the  language  is  plain,  words  or  phrasess 


48  Federal  Corpoe^vtion  Tax  Law. 

should  not  be  inserted  so  as  to  incorporate  in  the  statute  a  new  and 
distinct  provision.     U.  S.  v.  Temple,  105  U.  S.  97,  26  L.  E.  967. 

38.  If  an  interpretation  of  any  part  would  operate  unjustly  or 
absurdly  or  contrary  to  the  meaning  of  the  act,  it  should  be  re- 
jected. The  construction  must  be  such  that  the  whole  can  stand 
if  possible.  Heydenfeldt  v.  Daney  Gold  &  Sil.  Min.  Co.,  13  U.  S. 
634,  23  L.  W.  995. 

39.  When  a  statute  limits  a  thing  to  be  done  in  a  particular 
mode,  it  includes  a  negative  of  any  other  mode.  R.  &  G.  R.  Co. 
V.  Eeid,  13  Wall.  269,  20  L.  E.  570 ;  Stephen  v.  Smith,  10  Wall. 
321,  19  L.  E.  933. 

40.  In  all  cases  where  the  clauses  of  an  Act  of  Congress  are 
ambiguous  or  doubtful,  it  is  admissible  for  purposes  of  interpreta- 
tion and  construction  to  give  great  deference  if  not  controlling 
effect  to  the  interpretation  given  to  such  ambiguous  language 
foimd  in  the  act  as  was  given  to  it  by  that  department  of  the 
national  government  to  whom  the  duty  of  enforcing  the  act  is 
given.  Peabody  v.  Daughlin,  16  Wall.  240,  21  L.  E.  311;  U.  S. 
V.  Tanner,  147  U.  S.  661,  13  Sup.  Ct.  Rep.  436,  37  L.  E.  321; 
Robinson  v.  Davoning,  127  U.  S.  607,  8  Sup.  Ct.  Rep.  1328,  32 
L.  E.  269;  Hahn  v.  U.  S.,  107  U.  S.  402,  2  Sup.  Ct.  Rep.  494, 
27  L.  E.  527;  Vissell  v.  Penrose,  8  How.  317,  12  L.  E.  1095;  St. 
Paul  M.  &  M.  Ry.  Co.  v.  Fels,  137  IT.  S.  528,  11  Sup.  Ct.  Rep. 
168,  34  L.  E.  767;  IT.  S.  v.  Dickson,  15  Peters  141,  10  L.  E.  689. 

41.  While  it  is  the  duty  of  the  courts  to  ascertain  the  meaning 
from  the  words  used  in  the  statute  and  the  subject-matter  to  which 
it  relates,  there  is  an  equal  duty  to  restrict  the  meaning  of  general 
words,  whenever  it  is  found  necessary  to  do  so,  in  order  to  carry 
out  the  legislative  intent.     IT.  S.  v.  Freight  Assn.,  166  IT.  S.  290. 

42.  To  understand  the  true  meaning  of  u  clause,  it  is  necessary 
to  f>bserve  what  the  Hubject  was  in  regard  to  which  Congress 
attempted  1(»  legislate.     Market  (%>.  v.  Hoffman,   101  IT.  S.  112. 

43.  '{"he  nilc  tiiat  every  clause  in  a  statute  should  liav(^  effect, 
nrifl  one  [Kirtion  sboulil  not  li<'  j)l;i('('(l  in  iintagonisin  to  another,  is 
well  settled.  Petro  r.  (;ommercial  P»ank,  142  U.  S.  544;  Warren 
V.  U.  S.,   168   Fed.  682. 

44.  It  is  ii  general  rule  in  construing  statutes  tlint  cfTcct  must 
he-  irivcii   lo  ;ill   tlicir  prov  i-ions  if  su<'li   construction   is  consistent 


Construction  and  Interpretation  of  the  Act.   49 

with  the  general  purposes  of  the  act  and  the  provisions  are  not 
necessarily  conflicting.  All  acts  of  the  legislature  should  be  so 
construed  if  practicable  that  one  section  will  not  defeat  or  destroy 
another,  but  explain  and  support  it.  When  a  provision  admits  of 
more  than  one  construction,  that  one  will  be  adopted  which  best 
serves  to  carry  out  the  purposes  of  the  act.  Bernier  v.  Bernier. 
147  U.  S.  242,  37  L.  E.  152. 

45.  It  is  the  duty  of  the  court  to  give  effect,  if  possible,  to 
every  clause  and  word  of  a  statute,  avoiding,  if  it  may,  any  con- 
struction which  implies  that  the  legislature  w^as  ignorant  of  the 
language  it  employed.  Inhabitants  of  Montclair  v.  Ramsdell,  107 
IJ.  S.  431,  27  L.  E.  431. 

46.  Statutes  must  be  interpreted  according  to  the  intent  and 
meaning  of  the  legislature ;  and  that  intention  must,  if  practicable, 
be  collected  from  the  words  of  the  act  itself;  or,  if  the  language 
is  ambiguous,  it  may  be  collected  from  other  acts  in  pari  materia, 
in  connection  with  the  words,  and  sometimes  from  the  cause  or 
necessity  of  the  statute;  but  where  the  language  af  the  act  is 
unambiguous  and  explicit,  courts  are  bound  to  seek  for  the  in- 
tention of  the  legislature  in  the  words  of  the  act  itself,  and  they 
are  not  at  liberty  to  suppose  that  the  legislature  intended  anythino; 
different  from  what  their  language  imports.  New  Lamp  Chimney 
(^o.  V.  A.  B.  &  C.  Co.,  91  U.  S.  256. 

47.  Words  and  phrases  are  often  found  in  different  provisions 
of  the  same  statute,  which,  if  taken  literally,  without  any  qualifi- 
cation, would  be  inconsistent  and  sometimes  repugnant,  when  by  a 
reasonable  interpretation  —  as  by  qualifying  both,  or  by  restrict- 
ing one  and  giving  to  the  other  a  literal  construction  —  all  become 
harmonious,  and  the  whole  difficulty  disappears;  and  in  such  a 
case  the  rule  is,  that  repugnancy  should,  if  practicable,  be 
avoided ;  and  that,  if  the  natural  import  of  the  words  contained 
in  the  respective  provisions  tends  to  establish  such  a  result,  the 
case  is  one  where  a  resort  may  be  had  to  construction  for  the 
purpose  of  reconciling  the  inconsistency,  unless  it  appears  that  the 
difficulty  can  be  overcome  without  doing  violence  to  the  language 
of  the  lawmaker."  Xew  Lamp  Chimney  v.  Ansonia  Brass  «&r 
Copper  Co.,  91  U.  S.  256,  27  L.  E.  336. 

48.  The  correct  rule  of  interpretation  is,  that  if  divers  statutes 

Fed.  Corp.  Tax  —  4. 


50  Federal  Corporation  Tax  Law. 

relate  to  the  same  thing,  they  ought  all  to  be  taken  into  considera- 
tion in  construing  any  one  of  them,  and  it  is  an  established  rule 
of  law,  that  all  acts  in  pari  materia  are  to  be  taken  together,  as 
if  they  were  one  law.  Dough.  30,  2  Term  Rep.  387,  586,  4 
Maule  &  Selw.  210.  If  a  thing  contained  in  a  subsequent  statute 
be  within  the  reason  of  a  former  statute,  it  shall  be  taken  to  be 
within  the  meaning  of  that  statute  (Lord  Raym.  1028)  ;  and  if 
it  can  be  gathered  from  a  subsequent  statute  in  pari  materia',  what 
meaning  the  legislature  attached  to  the  words  of  a  former  statute, 
they  will  amount  to  a  legislative  declaration  of  its  meaning,  and 
will  govern  the  construction  of  the  first  statute.  Morris  v.  Mellin, 
6  Barn.  &  Cress.  454,  7  Barn.  &  Cress.  99.  Wherever  any  words 
of  a  statute  are  doubtful  or  obscure,  the  intention  of  the  legisla- 
ture is  to  be  resorted  to,  in  order  to  find  the  meaning  of  the  words. 
Wimbisli  V.  Tailbois,  Plowd.  57.  A  thing  which  is  within  the 
intention  of  the  makers  of  the  statute,  is  as  much  within  the  statute 
as  if  it  were  within  the  letter.  Zouch  v.  Stowell,  Plowd.  366 ;  U. 
S.  V.  Freeman,  3  How.  U.  S.  556,  11  L.  E.  724. 

49.  It  is  undoubtedly  the  duty  of  the  court  to  ascertain  the 
meaning  of  the  legislature  from  the  words  used  in  the  statute  and 
the  subject-matter  to  which  it  relates;  to  restrain  its  operation 
within  narrower  limits  than  its  words  import,  if  the  court  U 
satisfied  that  the  literal  meaning  of  its  language  would  extend  to 
cases  which  the  legislature  never  designed  within  it.  McKee  v. 
United  States,  164  U.  S.  287,  41  L.  E.  437. 


Scope  and  Intent  of  the  Act.  51 


CHAPTER  IV. 

SCOPE    AND    INTENT   OF   THE    ACT. 

Sec.  16.  General  Discussion  of  the  Act  With  Reference  to 
the  Companies  Affected  Thereby.  —  At  the  very  commencement 
of  the  act  (section  1,  lines  1-10)  is  found  an  enumeration  of  the 
several  classes  of  companies  upon  which  the  act  is  to  operate  in 
the  form  of  being  subject  to  the  payment  of  the  excise  tax  therein 
provided.  The  portion  of  the  act  here  referred  to  is  as  follows 
(section  1,  lines  1-37)  : 

Every  corporation,  joint  stock  company  or  association  organized  for  profit, 
having  a  capital  stock  represented  by  shares,  and  every  insurance  company 
now  or  hereafter  organized  under  the  laws  of  the  United  States,  or  of  any 
State  or  Territory  of  the  United  States,  or  under  the  Acts  of  Congress  appli- 
cable to  Alaska  or  the  District  of  Columbia,  or  now  or  hereafter  organized 
under  the  laws  of  any  foreign  country,  and  engaged  in  business  in  any  State 
or  Territory  of  the  United  States,  or  in  Alaska,  or  in  the  District  of  Columbia, 
shall  be  subject  to  pay  annually  a  special  excise  tax,  —  provided,  however, 
that  nothing  in  this  section  contained  shall  apply  to  labor,  agricultural,  or 
horitcultural  organizations  or  to  fraternal  beneficial  societies,  orders,  or  asso- 
ciations operating  under  the  lodge  system,  and  providing  for  the  payment  of 
life,  sick,  accident,  and  other  benefits  to  the  members  of  such  societies,  orders, 
and  associations  arid  dependents  of  such  members,  nor  to  domestic  building 
and  loan  associations  organized  and  operated  exclusively  for  the  mutual 
benefit  of  their  members,  nor  to  any  corporation  or  association  organized  and 
operated  exclusively  for  religious,  charitable,  or  educational  purposes,  no  part 
of  the  net  income  of  which  inures  to  the  benefit  of  any  private  stockholder  or 
individual. 

Treasury  recnilations  (T.  D.  1510,  December  3,  1900,  see 
Appendix  C.)  define  very  clearly  the  class  of  corporations  which 
are  subject  to  the  operation  of  the  Federal  Corporation  Tax  Law. 
In  the  regulation  here  referred  to  is  found  the  following  language : 

The  attention  of  collectors  and  others  is  especially  called  to  the  fact  that 
the  Federal  Corporation  Tax  applies  to  all  corporations,  joint  stock  com- 
panies, or  associations,  or  insurance  companies  described  therein,  except  those 


52  Federal  Coepoii^ition  Tax  Law. 

specifically  exempted  without  reference  to  the  kind  of  business  carried  on. 
For  statistical  purposes,  all  such  corporations,  joint  stock  companies,  and 
associations  will  be  classified  as  follows: 

"Class  A.  Financial  and  Commercial.  —  Including  banks,  banking  associa- 
tions, trust  companies,  guaranty  and  surety  companies,  title  insurance  com- 
panies, building  associations  (if  for  profit),  and  insurance  companies,  not 
specifically  exempt. 

"  Class  B.  Public  Service.  —  Such  as  railroads,  steamboat,  ferryboat,  and 
stage  line  companies;  pipe  line,  gas,  and  electric  light  companies,  express, 
transportation,  and  storage  companies;  telegraph  and  telephone  companies. 

"  Class  C.  Industrial  and  Manufacturing.  —  Such  as  mining,  lumber,  and  coke 
companies;  rolling  mills;  foundry  and  machine  shops;  saw  mills;  flour, 
woolen,  cotton,  and  other  mills;  manufacturers  of  cars,  automobiles,  elevators, 
agricultural  implements  and  all  articles  manufactured  wholly  or  partly  or  in 
part  from  metal,  wood,  or  other  material;  manufacturers  or  refiners  of  sugar, 
molasses,  sirups,  or  other  products ;  ice  and  refrigerating  companies ;  slaughter 
houses,  tannery,  packing,  or  canning  companies,  etc. 

"Class  D.  Mercantile.  —  Including  all  dealers  (not  otherwise  classed  as  pro- 
ducers or  manufacturers)  in  coal,  lumber,  grain,  produce,  and  all  goods,  wares, 
and   merchandise. 

"  Class  E.  Miscellaneous.  —  Such  as  architects,  contractors,  hotel,  theater, 
or  other  companies  or  associations,  not  otherwise  classed." 

National  banks  do  not  come  within  any  of  the  exemptions 
named  in  the  act  (T.  D.  1606,  March  29,  1910,  see  Appendix  K.). 

In  order  to  clearly  grasp  the  scope  and  content  of  the  act  under 
discussion,  it  will  now  be  necessary  to  define  some  of  the  terms 
used  in  that  portion  of  the  Federal  Corporation  Tax  Act  above 
set  forth- 


Sec.  17.  Definition  of  a  Corporation. —  A  corporation  is  a 
product  of  the  expression  of  the  sovereign  political  power  of  the 
State  in  the  formation  of  the  creation  of  a  juristic  person  possess- 
ing such  limited  powers  as  may  be  granted  to  it  by  the  legislative 
branch  of  our  state  or  national  governments.  Under  the  terms  of 
the  act  itself  in  order  to  be  subject  to  the  operation  thereof,  the 
corfx>ration  must  be  organized  for  profit,  and  have  a  capital  stock 
represented  by  shares. 

Sec.  18.  Definition  of  Joint  Stock  Companies. —  A  joint 
stock  company  is  a  r/j///«-y)rivate  coriniration,  wherein  a  number 
of  individuals  have  unit/;d  for  purposes  of  common  profit  by  con- 


Scope  and  Intent  of  the  Act.         53 

tribiiting  to  a  common  capital  divided  into  shares,  all  of  which 
are  alienable  at  the  option  of  the  owner. 

Commenting  on  the  character  of  joint  stock  companies,  the  New 
York  Supreme  Court  (Appellate  Division,  Second  Department) 
in  Lane  v.  Albortson,  78  App.  Div.  GOT,  113  V\.  Rep.  047,  79 
N.  Y.  Supp.  947,  spoke  as  follows: 

Thf  principal  dilierence  between  a  copartnership  and  a  joint  stock  corpora- 
tion is  tliat  there  is  in  the  latter  as  a  rule  no  delectus  personarum,  and  the 
transfer  of  the  shares  or  th«  death  of  a  member  does  not  dissolve  it.  In 
People  ex  rel.  Winchester  v.  Coleman,  133  N.  Y.  279,  Finch,  J.,  says:  "  The 
People  ex  rel.  Piatt  v.  Wemple,  117  N.  Y.  136,  shows  very  forcibly  how  almost 
tlie  full  measure  of  corporate  attributes  has,  by  legislative  enactment,  been 
bestowed  upon  joint  stock  associations  '  until  the  difference,  if  there  be  one, 
is  obscure,  elusive,  and  difficult  to  see  and  describe,'  and  proceeds  to  point 
out  that  the  essential  difference  lies  in  the  fact  that  a  corporation  drowns 
tlie  individual  rights,  while  the  association  leaves  the  individual  rights  un- 
impaired, in  that  the  common-law  liability  for  debts  remains  unchanged  and 
unimpaired.  In  the  case  referred  to  (People  ex  rel.  Piatt  v.  Wemple),  the 
court,  per  Danforth,  J.,  say :  '  Nor  is  the  principal  question  altogether  new. 
In  Waterbury  v.  Merchants  Union  Express  Co.,  50  Barb.  158,  the  nature  and 
legal  character  of  the  defendant,  a  joint  stock  association,  created  in  like 
manner  with  the  one  before  us,  was  held  to  have  all  the  attributes  of  a  cor- 
poration, and  all  its  incidents  except  a  common  seal.  The  statutes  from  1849 
to  18C7  were  examined  and  held  to  confer  the  qualities  which  distinguish  a 
comporation  from  a  partnership,  and  to  establish  the  relations  of  a  member 
of  the  association  as  those  of  a  stockholder  in  a  corporation,  and  not  those 
of  an  individual  in  a  partnership,  and  that  in  controversies  affecting  them  the 
analogies  afforded  by  laws  and  jurisprudence  in  the  case  of  corporations 
should  be  followed,  and  not  those  derived  from  a  simple  partnership.'  "  And 
in  the  Waterbury  case,  supra,  the  court  say:  "Their  property  or  capital  is 
represented  in  shares  and  certificates  of  stock  differing  in  no  respect  from 
shares  and  stock  certificates  in  corporations.  *  *  *  It  may  very  well  be 
that  in  the  case  of  actual  insolvency  the  shareholder,  in  view  of  his  con- 
tingent liability,  should  have  a  quicker  remedy  to  wind  up  and  close  the 
concern  than  the  statute  laws  of  this  State  allow  in  the  case  of  corporations 
other  than  those  organized  for  banking  purposes.  Be  this  as  it  may,  it  is 
nevertheless  true  that  the  situation  and  relations  of  a  shareholder  in  one  of 
these  associations  are  in  other  respects  alike  and  very  exactly  like  those  of 
a  stockholder   in  a  corporation." 

In  Elliott  V.  Freeman  et  al.,  220  TJ.  S.  178,  the  court  in  con- 
struing the  federal  corporation  tax  spoke  as  follows: 

Under  the  terms  of  the  Corporation  Act  corporations  and  joint  stock  asso- 
ciations must  be  such  as  are  now  or  hereafter  nrirnnized  under  the  l.iws  of  the 
United  States,  or  of  any  State  or  Territory  of  the  United  States,  or  under  the 
Acts  of  Congress  applicable  to  Alaska  or  the  District  of  Columbia. 


54  FedekuVI.  Corporation  Tax  Law. 

*  *  *  As  we  have  coiistrufd  the  Corporation  Tax  Act  in  the  j)revious 
case,  Flint  v.  Stone  Tracy  Co.,  ante,  the  tax  is  imposed  upon  doing  business 
in  a  corporate  or  ^uosi-corporate  capacity;  that  is  with  the  facility  or  advan- 
tage of  corporate  organization. 

It  was  the  purpose  of  the  act  to  treat  corporations  and  joint  stock  com- 
panies similarly  organized  in  the  same  way  and  assess  them  upon  tiie  facility 
in  doing  business  which  is  substantially  the  same  in  both  forms  of  organiza- 
tion. Joint  stock  companies  are  not  infrequently  organized  under  the  statute 
laws  of  a  State,  deriving  therefrom,  in  a  large  measure,  the  characteristics 
of  a  corporation. 

The  language  of  the  act  •  *  *  imports  an  organization  deriving  power 
from  statutory  enactment.  The  statute  does  not  say  under  the  laws  of  the 
United  States,  or  a  State,  or  lawful  in  the  United  States,  or  in  any  State,  but 
is  made  applicable  to  such  as  are  organized  under  the  laws  of  the  United 
States,  etc.  The  description  of  the  corporation  or  joint  stock  association  as 
one  organized  under  the  laws  of  a  State  at  once  suggests  that  they  are  sucn 
as  are  the  creation  of  statutory  law,  from  which  they  derive  their  powers  and 
are  qualified  to  carry  on  their  operations. 

*  *  *  The  difference  between  joint  stock  associations  at  common  law 
and  those  organized  under  statutes  are  well  recogniz^ed.  Cook  on  Corpora- 
tions, §  505. 

There  is  an  essential  difference  between  a  joint  stock  company  as  it  exists 
at  common  law  and  a  joint  stock  company  having  extensive  statutory  powers 
conferred  upon  it  by  the  State  within  which  it  is  organized.  The  latter  kind 
of  joint  stock  company  is  found  in  England  and  in  the  State  of  New  York. 
To  such  an  extent  have  these  statutory  powers  been  conferred  on  joint  stock 
companies  that  the  only  substantial  difference  between  them  and  corporations 
is  that  the  members  are  not  exempt  from  liability  as  partners  for  the  debts 
of  the  company. 


Sec.  19.  Definition  of  Association.  —  "Association"  is  a 
generic  term  and  may  indiflferontlv  comprehend  a  voluntary  con- 
federacy which  is  a  partnershi])  dissohible  ])y  tlie  persons  who 
formed  it  or  a  corjwration  confederacy,  deriving  its  existence 
from  a  statute,  and  dissohible  only  by  law.  Thomas  v.  Dakin,  22 
Wend.  N.  Y.  9,  104. 

In  the  words  of  the  United  States  Supreme  Court  (U.  S.  v. 
Trinidad  Coal  Coking  Co.,  137  U.  S.  101,  11  Sup.  Ct.  57,  34 
L  K.  r;40): 

The  words  "  asROciation  of  personH  "  are  often  not  inaptly  employed  to  do- 
Bcrilx'  a  corporation.  An  incorporated  company  is  an  aHSOciatioii  of  indi 
viduniR  acting  as  a  Hiiigli-  person,  and  by  (heir  corporate  name.  As  tliis  court 
liaH  Haid,  j)rivat<'  corporations  ar<'  hut  asHociations  of  individuals  unit<'<l  for 
Home  ronirnon  [tiirpo-e  nnd  iiermiHcil  by  law  to  use  a  eommon  seal,  and  to 
change  its  membern  withfiut  a  diHsoliil  inn  nf  Hie  association. 


Scope  and   Intent  of  the  Act. 


')0 


Undoubtedly  the  meaning  of  the  word  "  associaticjn,"  as  here 
used  in  the  Corporation  Tax  Act  is  to  be  found  by  applicarioii  of 
the  cjiusdcm  generis  rule,  that  is,  it  was  employed  to  include  any 
and  all  kinds  of  organizations  of  a  character  analagous  to  cor- 
l)orations  and  joint  stock  companies,  provided  only  that  such 
associations  were  organized  for  profit  and  had  a  capital  stock 
represented  by  shares.  In  other  words,  it  is  plain,  that  the  word 
"  associations "  here  would  include  all  unincorporated  bodies 
organized  for  profit  and  having  a  capital  stock  represented  by 
shares.  (See  Nat.  Bankruptcy  Act  of  1898,  sec.  4,  subdiv.  b.) 
It  is  quite  likely  that  the  phraseology  here  used  was  taken  from 
the  Franchise  Tax  xVct  of  the  State  of  New  York  (see  Session 
Laws  of  New  York,  1880,  ch.  542)  which  was  entitled  "An  Act 
to  provide  for  raising  taxes  for  the  use  of  the  State  upon  certain 
corporations,  joint  stock  companies  and  associations." 

The  act  here  referred  to  was  held  applicable  by  the  New  York 
(.^urt  of  Appeals  to  any  combination  of  individuals  entering  into 
an  agreement  to  carry  on  a  business  for  profit  upon  terms  which 
embody  therein,  as  rules  and  regulations  of  such  business,  the 
enabling  provisions  of  any  State  statute  governing  such  associa- 
tion. (See  People  ex  rel.  Piatt  v.  Wemple,  117  N.  Y.  136;  see 
also  Waterbury  v.  Merchants  Union  Express  Co.,  50  Barb.  158; 
Westcott  V.  Fargo,  6  Lansing  319;  Id.,  61  N.  Y.  542.) 

In  determining  what  associations  come  within  the  purview  of 
the  Corporation  Federal  Tax  Law  the  opinion  of  the  Attorney- 
General  of  the  United  States,  rendered  February  14,  1910  (see 
Appendix  EE.),  is  exceedingly  helpful.  This  opinion  reads  as 
follows,  to  wit: 

Department  of  Justice, 

February  14,  1910. 

SiB:  — I  have  the  honor  to  acknowledge  receipt  of  your  communications  of 
January  22  and  February  4,  1910,  in  which  you  ask  my  opinion  with  refer- 
ence to  whether  or  not  certain  business  concerns  fall  within  the  provisions  of 
section  38  of  the  Act  of  August  5,  1910  (36  Stat.  112),  which  provides  for  an 
excise  tax  "with  respect  to  the  carrying  on  or  doing  business"  by  corpora- 
tions, joint  stock  companies,  and  associations;  and  in  my  reply  1  will  consider 
separately  the  several,  classes  of  concerns  to  which  you  refer,  with  the  excep- 
tion of  certain  realty  associations  to  he  dealt  with  in  a  separate  opinion. 

1.  Partnership  associations,  organized  under  the  laws  of  the  State  of 
Pennsylvania. 


66  Federal  Cokpokation  Tax  Law. 

By  reference  to  the  Pennsylvania  statutes,  1  find  that  the  material  provi- 
sions of  the  law  under  which  such  associations  are  organized  are  as  follows: 
The  association  is  formed  by  three  or  more  persons  subscribing  and  contrib- 
uting capital  thereto,  which  alone  shall  be  liable  for  the  debts  of  the  associa 
tion,  and  such  person?  sign  and  acknowledge  a  statement  in  writing,  which 
contains  the  names  of  the  parties  composing  the  association,  the  amount  of 
capital  subscribed  bj'  each,  the  total  amount  of  capital,  and  when  and  how 
the  same  is  to  be  paid,  the  character  of  the  business  to  be  conducted,  and 
location  of  the  same,  the  name  of  the  association,  with  the  word  "  Limited  " 
added  as  a  part  thereof,  the  contemplated  duration  of  the  association  (which 
shall  not  in  any  case  exceed  twenty  years)  and  the  names  of  the  officers  of 
said  association  selected  in  conformity  with  the  provisions  of  the  act ;  which 
statement  is  recorded  in  the  office  of  the  recorder  of  deeds  of  the  proper 
county. 

The  members  of  the  association  are  not  individually  liable  for  the  indebted- 
ness thereof  except  if  an  execution  is  issued  against  the  association  and  no 
property  can  be  found,  tlie  court,  after  investigation,  shall  order  the  issuance 
of  an  execution  against  the  members  of  the  association,  who  shall  be  liable 
to  the  extent  of  the  capital  subscribed  and  remaining  unpaid  by  them.  The 
word  "  limited  "  shall  constitute  tlie  last  word  of  the  name  of  the  association. 
The  interest  of  a  member  in  the  association  is  declared  to  be  personal  estate, 
and  it  may  be  transferred,  given,  bequeathed,  distributed,  sold,  and  assigned 
under  such  rules  and  regulations  as  the  association  shall  from  time  to  tim» 
prescribe  by  a  majority  vote  of  its  members  in  number  and  value  of  their 
interest;  and,  in  the  absence  of  rules  and  regulations  the  transferee  of  an 
interest  is  not  entitled  to  participate  in  the  business  of  the  association  unless 
elected  to  membership  by  a  vote  of  the  majority  of  the  members  in  number 
and  value  of  interest.  Anj-  change  of  ownership  w-liich  occurs  in  the  absence 
of  rules  and  regulations  governing  such  transfer,  and  wliicli  is  not  followed 
by  election  to  membership,  entitles  the  transferee  only  to  the  value  of  the 
interest  so  acquired  at  the  time  of  acquiring  the  same,  at  a  price  and  terms 
to  be  agreed  upon,  and  in  default  of  agreement,  at  a  price  and  terms  to  be 
determined  by  an  apprai.scr  to  be  ap])ointcd  by  tlie  Court  of  Common  Pleas. 

One  meeting  per  annum  is  required  of  the  association,  and  it  is  also  re- 
quired that  there  shall  be  elected  not  less  than  three  nor  more  than  five  man- 
agers, who  sliall  manag<'  the  affairs  of  the  association,  and  it  is  prohibited 
from  contracting  any  lial)ility  except  l>y  one  or  more  of  the  managers.  The 
association  may  divide  the  profits  of  the  business  in  such  manner  and  amounts 
aB  the  majority  of  its  members  may  determine,  which  division  shall  not 
"diminish  or  impair  the  capital  of  the  said  association."  It  is  prohibited 
from  loaning  its  cre'dit,  name,  or  capital  to  any  nieinbcr  of  the  associatiim. 
It  may  be  dissolved  by  the  expiration  of  the  period  fixed  for  its  duration,  or 
by  a  Tn.ijority  \^lA^'  of  its  members  in  numl)er  and  value  of  interest;  and  when 
dissolved,  aft<'r  payintr  its  liabilities,  the  remainder  of  its  assets  shall  br 
distributed  in  proportion  to  tlie  int<Tests  of  tli<'  nicnibers.  It  is  authorized 
to  adopt  and  use  a  common  senl;  ami  cnut  t  ilmt  icui'-  tn  the  <-;iiiit;il  may  be 
mndf  in  real  or  personal  property,  .'it  a  vahi.it  imi  fo  lie  .Tpjiroved  by  nil  the. 
menitifTH.  All  roMl  pstnt*-  i><  hidd  and  own'-d  in  the  nitnie  of  the  assncintion. 
and    it   munt   "sue   or   bo   sued    in    the    a.ssociation    name,    and    wlien    suit    is 


Scope  and  Intjjmt  of  the  Act.  57 

brought  agiiinst  any  such  iissociatioii  service  thereof  shall  be  made  upon  the 
cliairnian,  secretary,  and  tiie  treasurer  thereof,  vviiich  servic<'  sliall  be  as  conijjieto 
and  effective  as  if  made  upon  each  and  every  member  of  sucii  association ;  '* 
and  service  of  process  may  also  be  had  upon  any  agent,  chief,  or  any  other 
clerk  or  upon  any  director  or  manager  of  such  association  in  any  county  wiiere 
the  association  may  maintain  or  keep  an  office  for  the  transaction,  of  business. 

The  excise  tax  created  by  section  38  of  the  Act  of  August  5,  1909,  is  made 
to  apply  to  "  every  corporation,  joint  stock  company,  or  association  organized 
for  profit,  and  having  a  capital  stock  represented  by  shares  *  »  *  organ- 
ized under  the  laws     *     *     *     of  any  State." 

I  have  no  doubt  that  an  association  organized  as  above  shown  falls  within 
the  provisions  of  this  act.  Its  organization  is  perfected  under  statutory 
authority,  and  while  it  is  denominated  a  partnership  association,  yet  it  is 
given,  as  a  separate  entity,  every  privilege  and  power  that  is  essential  to 
constitute  an  incorporated  body.  In  fact,  some  privileges  are  conferred  which 
might  have  been  omitted  and  still  it  would  fall  within  the  provisions  of  the 
act. 

A  similar  question  arose  in  the  case  of  Liverpool  Insurance  Co.  v.  Massa- 
chusetts, 77  U.  S.  56G.  A  statute  of  the  State  of  Massachusetts  imposed  a 
tax  upon  "  each  fire,  marine  and  fire,  and  marine  insurance  company,  incor- 
porated or  associated  under  the  laws  of  any  government  or  State  other  than 
one  of  the  United  States."  It  was  insisted  that  this  insurance  company  was 
not  a  corporation  or  association  within  the  meaning  of  the  statute.  It  ap- 
peared from  an  analysis  of  its  articles  of  association,  as  authorized  by  the 
Parliament  of  Great  Britain  that  ( 1 )  it  had  a  distinctive  and  artificial  name 
by  which  it  could  make  contracts;  (2)  that  it  could  sue  and  be  sued  in  the 
name  of  one  of  its  officers,  and  the  whole  body  was  bound  by  the  judgment ; 
(3)  that  it  had  a  provision  for  perpetual  succession  by  transfer  and  trans- 
mission of  its  shares  of  capital  stock;  and  (4)  that  its  existence  as  an  entity, 
apart  from  its  shareholders,  was  recognized  by  the  Act  of  Parliament,  which 
enabled  it  to  sue  its  shareholders  and  be  sued  by  them.  On  the  other  hand, 
its  individual  members  were  liable  for  the  debts  of  the  company,  and  it  could 
not  be  sued  in  its  artificial  name,  and  the  Act  of  Parliament  under  which  it 
was  organized,  expressly  declared  that  such  organization  should  not  "  be  held 
to  constitute  the  body  a  corporation."  The  court  held  that  the  organization 
was  an  artificial  body  which  possessed  all  the  essential  elements  of  a  corpo- 
ration, and  that  the  declaration  in  the  act  under  which  it  was  organized,  that 
it  should  not  be  so  considered,  could  not  alter  the  fact,  and  therefore  held 
that  it  was  liable  to  the  tax  specified  in  the  Massachusetts  statute. 

An  association  organized  under  the  Pennsylvania  statute  has  an  artificial 
name  in  which  all  of  its  business  is  transacted,  and  by  which  it  can  sue  and 
be  sued;  it  has  perpetual  succession  for  the  length  of  time  specified  in  the 
articles  of  association,  and  while  there  is  no  positive  provision  which  author- 
izes it  to  sue  and  be  sued  by  a  member  of  the  association,  yet  there  can  be  no 
doubt  that  any  member  of  the  association  is  at  lilierty  to  make  a  separate 
contract  with  it  as  a  person,  and  that  an  action  thereon  could  ho  maintained 
by  either  party,  and  that  a  right  of  action  of  any  other  kind  might  arise,  and 
be  litigated  between  them.  In  addition  to  this,  a  member  of  the  association 
is  exempt  from  liability  for  its  indebtedness,  except  as  to  the  amount  of 
capital  subscribed  by  him. 


58  Federal  CoRPorwVTioN  Tax  Law. 

yuch  an  association  also  clearly  falls  within  the  definition  of  a  corporation 
given  by  -Mr.  Justice  Field  in  B.  &.  P.  R.  R.  Co.  f.  Fifth  Baptist  Church.  lOS 
U.  S.  330,  to  wit: 

"  Private  corporations  are  but  associations  of  individuals  united  for  some 
common  purpose  and  permitted  by  law  to  use  a  common  name  and  to  change 
its  members  without  a  dissolution  of  the  association." 

And  also  the  definition  given  by  the  Supreme  Court  of  New  York,  in  People 
r.  Assessors  of  \\'atertown,  1  Hill,  620,  which  was  quoted  with  approval  by  the 
Supreme  Court  of  Maine,  in  Sibley  r.  Lumber  Association,  93  Me.  401: 

"A  corporation  is  a  collection  of  individuals  united  in  one  body  under  such 
a  grant  of  privileges  as  secures  the  succession  of  members  without  changing 
the  identity  of  the  body,  and  constitutes  the  members  for  the  time  being  one 
artilicial  person  or  legal  being,  capable  of  transacting  some  kind  of  business 
like  a  natural  person." 

And  within  the  definition  given  by  Chief  Justice  Marshall  in  the  Dartmouth 
College  Case,  4  Wheat.  .517,  63G,  that — 

"A  corporation  is  an  artificial  being,  invisible,  intangible,  and  existing  only 
in  contemplation  of  law." 

The  law  creating  this  tax  contains  no  special  requirements  as  to  what 
powers  this  artificial  person  shall  possess,  the  only  essentials  being  that  it 
shall  be  organized  under  a  law,  that  its  object  shall  be  for  profit,  and  that 
it  shall  have  a  capital  stock  represented  by  shares.  The  capital  of  these 
associations  is  subscribed  for  in  the  usual  way,  and  the  members  own  an  in- 
terest in  the  capital  stock  in  proportion  to  the  amount  subscribed  by  them. 

In  1  C^ook  on  Corporations,  §  12,  it  is  said  that  a  share  of  stock  may  be 
defined  as  — 

"A  right  which  its  owner  has  in  the  management,  profits,  and  ultimate 
assets  of  the  corporation." 

The  interest  of  tlie  members  of  the  associations  in  question  certainly  falls 
within  this  definition.  It  is  true  that  the  issuance  of  certificates  of  shares  ia 
not  required,  but  a  certificate  of  stock  is  but  a  mere  muniment  of  title,  a  mere 
evidence  of  ownership  and   not  the  share   itself. 

"  It  operates  to  transfer  nothing  from  the  corporation  to  the  stockholder. 
but  merely  aflfords  to  the  latter  the  evidence  of  his  rights."  1  Cook  on  Cor- 
porations, 13. 

I  am  of  the  opinion,  therefore,  that  associations  organized  under  this  Penn- 
sylvania state  are  liable  to  tiie  tax  imposed  under  section  38  of  the  Act  of 
August  5,  1909. 

2.  Mutual  savings  banks  organiz-ed  under  an  act  for  the  incorporation  of 
SHvinfTH  hanks,  passed  by  the  legislature  of  West  Virginia  February  21.  1.SS7. 
and  amended  by  the  Act  of  February  24,   IHOH. 

Such  a  bank  may  he  organized  by  not  less  than  thirteen  persons,  citizens  of 
the  State,  whose  fitness  fur  (he  proposed  trust  is  certified  to  by  the  jiidj^e  <>r 
judges  of  the  Circuit  T'ourt  of  llie  county  wherein  the  jiroposed  sMvin^s  bank 
is  tf>  he  located.  The  form  of  llie  chiirter,  and  the  nicthmj  of  procuring  the 
snm'',  is  y)artieularly  set  forth.  From  (he  incorporators,  and  those  subse- 
quently added  (hereto,  if  (hey  are  selected  by  the  hotly  on  (lie  approval  of  tlie 
judge  or  a  board  of  tnisfres,  and  who  have  power  lo  act  for  the  corporation. 
Thesf    trustees   elect    from    (lieir   number    a    president    and    vice-y)residen(.    and 


Scope  and  Intent  of  the  Act.  5ii 

appoint  all  necessary  ofliccr.s  to  transact  the  buHiness  of  tlic  bank.  The  bank, 
wlun  organized,  is  authorized  to  receive  any  sum  of  money  for  deposit,  and 
to  invest  the  same  as  authorized  by  the  act,  and  the  deposits  with  dividends 
accrued  thereon  are  required  to  be  paid  to  the  depositors  under  rules  and 
regulations  to  be  adopted  by  the  board  of  trustees.  By  section  24  it  is  pro- 
vided that  the  income  or  profit  of  any  such  savings  bank,  after  the  deduction 
of  all  reasonable  expenses  incurred  in  the  management  thereof  and  the  guar 
anty  fund,  shall  be  divided  among  its  depositors  or  their  legal  representatives, 
at  such  times  as  may  he  fixed  by  its  by-laws.  There  is  no  capital  subscribed 
and  the  business  consists  in  receiving  deposits  and  investing  the  same  so  re- 
ceived in  accordance  with  the  provisions  of  the  charter  and  the  by-laws 
adopted  thereunder,  and  of  repaying  the  depositors;  and  all  the  profits,  alter 
the  payment  of  the  necessary  expenses,  are  divided  among  the  depositors. 

There  is  no  question  that  such  a  concern  is  a  corporation ;  but  is  it  a  cor- 
poration "  organized  for  profit  and  having  a  capital  stock  represented  by 
shares,"  as  is  required  by  the  statute?  In  a  certain  sense,  such  a  banking 
institution  is  organized  for  profit,  —  that  is,  it  affords  a  reasonably  safe 
means  for  the  investment  of  one's  capital;  but  its  organization  and  the  trans- 
action of  its  business  is  not  for  the  profit  of  those  who  constitute  its  man- 
aging body,  except  in  so  far  as  they  may  be  depositors.  But  the  more  serious 
question  is,  whether  such  an  institution  has  a  capital  stock  represented  by 
shares.  Can  the  depositors  who  place  their  money  temporarily  with  such  an 
institution,  having  no  right  to  participate  in  its  management,  be  regarded  as 
shareholders,  and  the  respective  amounts  deposited  be  considered  as  shares? 
1  think  an  answer  to  these  questions  may  be  found  in  the  following 
authorities: 

The  case  of  Huntington  v.  Savings  Bank,  96  U.  S.  388,  involved  an  institu- 
tion of  precisely  the  same  character.  The  suit  was  brought  by  an  adminis- 
trator of  a  deceased  trustee,  on  the  theory  that  he  was  entitled  to  a  pro  rata 
of  the  accumulated  profits.  In  discussing  the  nature  of  the  corporation, 
the  Supreme  Court,  .among  other  things,  said: 

"  It  is  to  be  noticed  that  the  charter  does  not  authorize  the  creation  of  any 
corporate  stock  or  capital,  nor  does  it  contemplate  the  existence  of  any  other 
than  the  deposits  which  may  be  made.  TTie  corporators  are  not  required  to 
contribute  anything.  There  are,  of  consequence,  no  shareholders.  Not  a  word 
is  said  in  the  instrument  respecting  any  dividends  of  capital,  or  even  of 
profits,  to  others  than  the  depositors.  Certainly  no  express  authority  is  given 
to  make  dividends  to  the  corporators;  and  we  discover  nothing  from  which 
such  authority  can  be  inferred: 

And  again : 

"The  institution  having  no  capita',  stock,  whatever  liability,  if  any  there 
may  be  to  the  corporators,  must  be  satisfied  out  of  the  profils  made  from  the 
deposits." 

And  with  reference  to  the  object  of  the  corporation,  it  was  said: 

"  It  is  not  a  commercial  partnership,  nor  is  it  an  artificial  being  the  mem- 
bers of  which  have  property  interests  in  it,  nor  is  it  strictly  eleemosynary. 
Its  purpose  is  rather  to  furnish  a  safe  depositary  for  the  money  of  those  mem- 
bers of  the  community  disposed  to  intrust  tlioir  property  to  its  keeping.  It  ir^ 
eomewh.at  of  the  nature  of  such  corporations  as  church  wardens  for  the  con- 


60  Federal  Corpoeation  Tax  Law. 

servation  of  tho  goods  of  a  parish,  the  college  of  surgeons  for  the  promotion 
of  medical  science,  or  the  society  of  antiquaries  for  the  advancement  of  the 
study  of  antiquities.  Its  purpose  is  a  public  advantage,  without  any  interest 
in  its  members." 

In  Hannon  v.  Williams,  34  N.  J.  Eq.  258,  the  court,  in  considering  the 
nature  of  a  savings  bank  of  this  character,  said: 

"  Savings  banks  differ  widely  in  their  objects,  organization,  and  character 
from  ordinary  banks  and  other  joint  stock  companies.  They  have  no  capital 
stock.  They  are  incoiporated  and  organized  not  for  the  advantage  of  the 
corporators,  but  solely  for  the  benefit  of  the  depositors.  Their  object,  &s 
stated  in  some  of  the  early  charters  of  this  State,  is  to  receive  and  safely  in- 
\est  the  savings  of  mechanics,  laborers,  servants,  minors,  and  others,  thus 
affording  to  such  persons  the  advantages  of  security  and  interest  for  their 
money,  and  in  this  way  ameliorating  the  condition  of  the  poor  and  laboring 
classes  by  engendering  habits  of  industry  and  frugality. 

"  Properly  organized  and  conducted,  a  savings  bank  is  a  gwasf-charitable 
and  purely  benevolent  institution  ;  its  only  object,  tlie  safekeeping  and  provi- 
dent investment  of  the  funds  of  the  depositors.  The  members  of  the  corpora- 
tion have  no  property  interests  in  its  funds,  of  which  they  are  by  law  con- 
stituted the  managers  and  guardians.  The  depositors  who  alone  are  bene- 
ficially interested  in  the  prosperity  of  the  bank,  have  no  voice  in  its  manage- 
ment, nor  even  in  the  selection  of  the  persons  to  whom  its  management  iti 
intrusted." 

In  Savings  Bank  v.  Town  of  New  London,  20  Conn.  111.  117,  the  Supreme 
Court  of  Connecticut,  in  speaking  of  the  nature  of  deposits  in  savings  banks, 
said: 

"Deposits  are  not  stock  within  the  most  enlarged  use  of  the  word;  nor 
are  they  rogulat«^d  as  such,  but  are  more  like  deposits  in  other  banks,  drawing 
a  stipulated  interest.  Tliey  are  money  put  into  the  hands  of  trustees,  to  be 
loaned  out;  and  whether  it  comes  to  the  trustees  from  one  man  or  many  men, 
makes  no  difference  in  view  of  the  law." 

Mr.  Justice  Field,  in  Bailey  v.  Clark,  88  IT.  S.  280,  in  defining  the  capital 
of  a  corporation,  said: 

"  When  used  with  respect  to  the  property  of  a  corporation  or  association, 
the  term  has  a  settled  meaning;  it  applies  only  to  thi-  property  or  means 
contriI)iit<'(i  by  the  stocklioldors  as  the  fund  or  basis  for  tho  business  or  enter- 
prise, for  wliicli  the  corjxiration  or  association  was  formed;"  and  the  court 
therefore  held  that  money  borrowed  from  time  to  time  by  a  banker  and  tem- 
Iiorarily  used  in  the  course  of  business  did  not  constitute  a  part  of  the  capital 
nf  thr  bank. 

I  have  iK'i-n  unable  to  find  any  authority  in  which  it  has  been  held  that  a 
savings  hank  organized  and  doing  business  as  is  provided  for  by  the  laws  of 
West  Virginia,  has  a  capital  stock  or  fhal   Us  depositors  are  shareholders. 

In  Ihe  ease  of  llannon  v.  Williams,  supra,  <he  court,  in  arriving  at  tho  con- 
clusion that  a  depositor  of  a  savings  bank  cojild  not  sot  off  his  doj)osit  after 
the  bank  liar!  failed  against  a  liability  to  the  hank  created  by  a  loan,  likened 
a  depositor's  relationship  in  some  rosportH  to  lha<  of  a  stockholder  as  well 
as  a  creditor,  saying  thai  in  prosperity  th<'y  are  tlu-  storkhnlders  anion?  whom 
the   profits   are  divided,   while    in   case   of   insolvency   they    are  the  creditors, 


Scope  and  Intent  of  tub  Act.         61 

among  whom  the  remaining  assets  are  to  be  distributed;  but  the  court,  as 
heretofore  shown,  held  tliat  sueli  ;iii  institution  lias  no  real  capital  stock,  and 
made  this  remark  only  by  way  of  argument  to  show  the  rights  of  depositors 
in  cases  of  the  character  there  under  consideration. 

From  the  language  of  the  act  creating  this  excise  tax  and  the  nature  of 
these  savings  banks,  I  am  constrained  to  hold  that  they  are  not  subject  to  the 
tax  imposed  by  section  36  of  the  Act  of  August  5,  1909. 

I  hardly  need  add  that  this  conclusion  does  not  apply  to  so-called  savings 
banks  which  have  a  capital  stock  as  other  banking  institutions. 

Respectfully, 

George  W.  Wickeesham. 
The  Secretary  of  the  Treasury. 

Attention  is  also  called  to  the  opinion  of  the  Attorney-General 
of  the  United  States,  of  date  March  31,  1910  (see  Appendix  HIL), 
which  reads  as  follows,  to  wit : 

SIR:  —  In  your  communication  of  February  4,  1910,  you  ask  my  opinion 
with  reference  to  whether  certain  business  concerns  which  are  known  as  the 
Snow  Associates,  the  Department  Store  Trust,  the  Fallow  Real  Estate  Trust, 
and  the  Broomfield  Building  Trust  fall  within  the  provisions  of  section  38  of 
the  Act  of  August  5,  1909  (36  Stat.  112),  wliich  provides  for  an  excise  tax 
with  respect  to  the  carrying  on  or  doing  business  by  corporations,  joint  stock 
companies,  and  associations,  and  in  reply  thereto  I  have  the  honor  to  say: 

All  of  these  companies  have  the  same  general  plan  of  organization,  and  the 
Snow  Associates  will  be  taken  as  an  example. 

This  company  was  organized  under  and  by  an  agreement  and  declaration 
of  trust  which  contained  the  following  provisions:  The  purpose  of  the  trust 
was  the  improving  and  holding  of  four  parcels  of  real  estate  which  were  par- 
ticularly described,  and  the  title  thereto  was  vested  in  three  persons  as  trus- 
tees, who  were  to  perform  their  duties  under  the  powers  granted  by  the 
declaration  of  trust.  The  title  to  the  property  was  vested  exclusively  in  the 
trustees,  so  that  the  shareholders  are  witliout  interest  therein  other  than  that 
conferred  by  their  shares  issued  under  the  terms  of  the  trust,  and  have  no 
right  to  call  for  partition,  accounting,  or  division  of  the  property,  rights,  or 
interests.  The  capital  is  $1,224,000  divided  into  shares  of  $100  each.  The 
trustees  issued  certificates  to  the  shareholders  for  the  number  of  shares  to 
which  each  was  entitled.  In  addition  to  the  shares,  amounting  to  $1,224,000, 
the  trustees  retained  in  their  hands  shares  of  the  par  value  of  $100,000  for 
the  purpose  of  raising  funds  to  improve  the  property,  and  to  purchase  addi- 
tional real  estate,  to  pay  for  mortgages,  etc.  At  meetings  of  the  shareholders 
each  share  is  entitled  to  one  vote.  Shareholders  may  transfer  their  shares 
on  surrender  of  their  certificates  upon  books  to  be  kept  by  the  trustees  in  the 
manner  usual  for  the  transfer  of  shares  of  stock  of  corporations,  or  in  such 
other  manner  as  the  trustees  may  prescribe.  The  death  of  a  shareholder  does 
not  terminate  the  trust  or  give  his  legal  representative  a  right  to  an  account- 
ing or  to  take  any  action  in  the  courts  or  otherwise,  against  the  shareholder'!. 
but  entitles  the  legal  representative  of  the  deceased  to  receive  a  new  certificate 


62  Fedkral  Cokpokation  Tax  Law. 

in  place  of  the  certiticatf  held  by  the  deceased.  No  assessments  can  be  made 
upon  the  sliareholders,  and  the  instrument  contains  a  stipulation  that  they 
are  exempt  from  personal  liability  on  account  of  contracts  entered  into  or 
torts  committed  by  the  trustees.  The  shareholders  meet  annually,  and  they 
have  also  such  special  meetings  as  may  be  called  by  the  trustees.  The  share- 
iiolders  at  such  meetings  till  vacancies  in  the  nuuilxT  of  trustees,  and  may 
depose  any  or  all  uf  the  trustees  and  elect  others  in  their  i)lace.  The  trustees 
are  empowered  to  execute  instruments  which  are  conclusive  upon  the  asso- 
ciates. The  trust  shall  continue  for  twenty  years  after  the  death  of  the  last 
surviving  (uiginal  subscriber;  provided  that  a  majority  in  interest  of  the  total 
number  of  shares  may  direct  a  sale  of  the  property  at  any  time,  and  upon 
such  sale  and  distribution  among  the  shareholders  in  proportion  to  their 
interest  the  trust  shall  be  terminated.  The  trustees  are  vested  with  full 
jower  of  leasing  and  letting,  and  have  exclusive  management  of  the  property, 
and  can  borrow  money  for  temporary  exigencies,  which  shall  bond  the  assets 
of  the  trust  but  not  the  shareholders  individually.  They  also  have  the  power 
to  mortgage  the  property  for  a  sum  not  exceeding  $100,000  for  the  purpose 
of  making  improvements  or  to  extinguish  liens;  and  they  determine  the  amount 
of  net  income  and  declare  such  dividends  as  in  their  opinion  may  be  judicious, 
and  invest  in  such  manner  as  they  see  fit  any  moneys  which  they  may  have 
on  hand. 

This  association  pos.sesses  all  of  the  essential  elements  of  a  common-law 
joint  stock  company,  which  is  defined  to  be  — 

"An  association  of  persons  for  the  purpose  of  business,  having  a  capital 
stock  divided  into  shares  and  governed  by  articles  of  association  which  i)re- 
-Hcribe  its  objects,  organization,  and  procedure,  and  the  rights  and  liabilities 
of  the  member.s,  except  that  the  articles  cannot  release  the  members  from  their 
liability  as  partners  to  the  creditors  of  the  company;  " 

And  is  otherwise  defined  as  — 

"An  association  of  individuals  possessing  a  common  capital  divided  into 
shares  of  which  each  member  po.ssesses  one  or  more.  These  shares  represent 
the  interests  of  the  members  and  are  transferable  by  the  owners  without  the 
con.sent  of  the  other  members  or  the  creditors  of  the  association."  2  Cook  on 
Corporations,  504. 

In  Spotswood  t'.  Morris,  12  Idaho,  I5(i0,  it  was  hold  that  any  corporation, 
association,  or  joint  stock  company  may  he  formed  by  individuals  for  the 
purchase  of  a  single  tract  of  real  estate,  the  title  to  which  may  Im>  taken  in 
the  trust<'«'. 

There  can  be  no  doubt  that  this  cniicem  is  ;in  association  organized  for 
profit  and  having  a  ca[)ital  stock  repr<'sented  by  shares.  Put  it  is  earnestly 
insiHted  on  behalf  of  these  eomj)anies  that  the  statutory  re(]uirements  that  a 
company  in  order  (o  be  amenable  to  the  tax.  shall  be  "organized  under  the 
laws  of  the  United  States  or  of  niiy  State  or  Territory  of  the  I'liited  States" 
has  reference  to  statutory  laws  which  preserilw'  specifieally  a  metliod  or  plan 
of  organization,  and  which  confer  franchises  upon  the  liody  when  organized; 
in  other  wf)rdH,  that  the  joint  slock  eoTiipaiiies  and  associations  cmiteiTinlatod 
by  the  art  n re  only  sueh  as  li;i\'e  -<oMie  form  of  eoijiorate  existenee.  If  this 
were  true,  then  the  j)tiraHe  "joint  stock  company  or  association"  would  ho 
surplusage,  but    I   nni   not   willing  to  give  nssont  to  such   a  construction. 


iSjcoi'E  AND  Intent  of  tub  Act.  (j.i 

That  this  company  has  an  organization  goes  without  saying.  Its  trustees 
compose  a  board  of  managers  ui)on  wlioni  rest  tlie  same  duties  as  those  im 
posed  upon  the  board  of  directors  of  a  corporation.  Tiie  trustees  may  be 
(liscliarged  and  their  successors  elected  in  the  same  way  or  in  a  way  similar 
to  that  by  which  the  directors  of  a  corporation  may  be  discharged  and  their 
successors  elected.  A  change  of  trustees  alFects  the  business  of  the  concern 
no  more  than  the  change  of  directors  of  a  corporation.  Trustees  come  and 
go,  but  the  title  to  the  property  remains  with  those  having  charge  of  its 
affairs,  and  its  business  is  still  conducted  by  them  precis<'ly  the  same  as  the 
business  affairs  of  a  corporation  continue  with  it  after  a  change  of  directors. 
The  same  conditions  exist  as  to  the  shareholders.  The  shareholders  are  trans- 
ferable by  assignment  in  like  manner  as  the  shares  of  a  corporation.  Such 
assignment  has  no  effect  whatever  on  the  business  of  the  company,  and  the 
shareholders  possess  only  the  rights  of  drawing  dividends  and  participating 
indirectly  by  vote  in  the  management  of  the  concern,  the  same  as  are  enjoyea 
by  the  shareholders  of  a  corporation.  Under  its  organization,  the  period  of 
its  existence  is  fixed  just  as  is  that  of  a  corporation  by  statute,  and  the  death 
of  its  trustees  or  shareholders  do  not  terminate  or  affect  its  existence  any 
more  than  do  the  death  of  the  directors  or  shareholders  of  a  corporation ;  and 
in  the  period  fixed  for  its  existence  by  the  articles  of  association  it  can  be 
dissolved  only  by  vote  of  its  shareholders,  which  power  is  likewise  possessed 
by  the  shareholders  of  a  corporation.  It  is  true  that  its  sliareholders  cannot 
by  contract  free  themselves  from  personal  liability:  but  in  Liverpool  Insur- 
ance Co.  V.  Massachusetts,  77  U.  S.  5G6,  575,  it  was  held  that  the  fact  that  the 
shareholders  of  a  joint  stock  company  organized  under  an  Act  of  Parliament, 
which  expressly  declared  that  such  company  should  not  constitute  a  corpora 
tion,  were  individually  liable  for  its  debts,  did  not  relieve  it  from  taxation 
under  a  statute  which  imposed  a  tax  upon  "each  fire,  marine  and  fire,  and 
marine  insurance  company  incorporated  or  associated  under  the  laws  of  any 
government  or  State  other  than  one  of  the  United  States." 

In  short,  the  organization  of  this  company  is  just  as  compact,  and  in  fact 
is  practically  the  same,  as  that  of  an  ordinary  corporation  organized  under  a 
general  or  special  statute. 

Nor  can  it  be  denied  that  its  organization  is  sanctioned  by  the  laws  of 
Massachusetts  and  that  it  obtains  its  vitality  from  those  laws,  just  as  much 
as  a  corporation  organized  under  a  special  act  of  the  legislature  of  that  State 
derives  its  vitality  from  such  act.  Such  an  association,  therefore,  is  based 
on  the  laws  of  Massachusetts,  and,  in  fact,  is  organized  thereunder. 

By  the  expression  "  laws  of  a  State,"  as  used  in  statutes,  reference  may  1h^ 
had  to  the  common  law,  as  well  as  the  statutory  law  of  such  State.  Lycoming 
Fire  Insurance  Co.  v.  MeSad  Wright  &  Son,  60  Vt.  515;  State  v.  Dyer,  67  Vt. 
690,  697. 

I  am  of  the  opinion,  therefore,  that  these  various  business  organizations 
are  "  joint  stock  companies  or  associations  organized  for  profit  and  having 
a  capital  stock  represented  by  shares,"  organized  under  the  laws  of  the  State 
of  Massachusetts,  within  the  meaning  of  the  excise  law  enacted  by  section  38 
of  the  Act  of  August  5.  1909.  and  that  they  are  amenable  to  the  tax  created 
thereby." 


64  Federal  Corporation  Tax  Law, 

Under  date  of  April  4,  1910  (see  Appendix  L.),  the  commis- 
sioner of  internal  revenue  issued  the  following  bulletin.  (T.  D. 
1611): 

To  the  Collectors  of  Internal  Revenue,  Revenue  Agents,  and   Other  Internal 
Revenue  O/Jicers: 

It  appears  that  there  are  in  Massachusetts,  and  perhaps  elsewhere,  various 
organizations  known  as  "  associates,"  "  trusts,"  or  "  real  estate  trusts,"  which 
are  not  organized  under  a  charter  but  are  formed  by  an  agreement  and  decla- 
ration of  trust.  It  appears  that  the  title  to  the  property  or  business  owned 
or  operated  by  these  organizations  is  vested  in  one  or  more  trustees,  and  cer- 
tificates are  issued  to  parties  in  interest  as  are  shares  of  stock  of  incorpo- 
rated concerns,  the  certificates  being  traded  in  as  are  shares  of  stock  and  the 
trustees  being  elected  and  their  successors  chosen  as  are  directors  in  any 
corporation  regularly  chartered.  The  organization  is  one  for  profit,  and  it 
possesses  all  of  the  essential  elements  of  any  joint  stock  company. 

In  reply  to  a  request  from  the  Secretary  of  the  Treasury  as  to  the  status 
of  these  organizations,  in  regard  to  the  corporation  excise  tax  provisions  of 
the  Tariff  Act  of  August  5,  1909,  the  honorable  attorney-general  advises  that 
these  concerns  are  joint  stock  companies  or  associations  organized  for  profit 
and  having  a  capital  stock  represented  by  shares  and  are  amenable  to  the  pro- 
visions of  the  Corporation  Excise  Tax  Law. 

Collectors  of  internal  revenue,  in  whose  districts  there  may  be  located 
organizations  of  this  cliaracter,  will  see  that  such  organizations  comply  witli 
the  provisions  of  this  law. 

In  Elliot  V.  Freeman  et  al,  220  U.  S.  178,  the  United  States 
Supreme  Court  held  that  the  federal  corporation  tax  was  not 
a])plicable  to  real  estate  trusts  organized  under  the  laws  of  Massa- 
chusetts, not  of  statutory  origin. 

In  Zonne  v.  Minneapolis  Syndicate  et  al.,  220  U.  S.  187,  the 
United  States  Supreme  Court  h(>l(l  that  where  a  corporation 
originally  organized  for  the  j)ur]iose  of  owning  and  renting  an 
office  building,  leasing  the  property  for  one  hundred  and  thirty 
years,  and  reorganized  and  })rnctically  went  out  of  business,  its 
sole  juithority  being  to  hold  the  title  subject  t(i  the  lease  and  to 
receive  ;iiid  distribute  the  rciilnls  accruing  thereunder,  or  the 
proceeds  of  sale,  if  the  property  should  be  sold;  that  niider  such 
circumstances  it  would  not  Ix;  liable  to  the  payment  of  the  federal 
cor[K>ration  tax. 

A  clear  limitation  of  \\\o  luunber  of  organizations  embraced 
witliin  the  act  is  to  I>e  found  in  the  opinion  of  tlic  United  States 
Supreme  Court  in   Klliot  /'.   Freeman  rf,  al.,  220  II.  S.   178.      In 


Scope  and  Intent  of  the  Act.         65 

that  case  the  court  held  in  effect  that  to  be  subject  to  the  payment 
of  the  tax  not  only  must  the  corporations  and  associations  be 
organized  for  profit  and  have  a  capital  stock  represented  by 
shares,  but  they  must  further  have  been  organized  under  some 
statute  or  derive  from  that  source  some  quality  or  benefit  not 
existing  at  the  common  law. 

Sec.  20.  Meaning  of  "Organization  for  Profit."  —  In  defin- 
ing what  corporations  shall  be  subject  to  the  tax  express  limitation 
is  to  be  found  in  the  words  "  only  such  corporations,  joint  stock 
companies  or  associations  as  are  organized  for  profit."  The 
qualifying  phrase  here  used,  to  wit,  "  organized  for  profit,"  un- 
questionably applies  to  each  of  the  classes  of  legal  entities  which 
precede  it,  to  wit,  corporations,  joint  stock  companies  and  associa- 
tions. 

In  other  words.  Congress  clearly  intended  to  include  within  the 
operation  of  the  act,  business  corporations,  and  to  exclude  all 
eleemosynary  bodies  organized  and  operated  exclusively  for  re- 
ligious, charitable  or  educational  purposes.  The  word  '^  organ- 
ized," as  here  used,  has  reference  to  the  inception  of  the  enter- 
prise, and  includes  all  such  preliminary  steps  as  might  be  neces- 
sary in  order  to  create  the  necessary  legal  machinery  for  conduct- 
ing the  particular  business  enterprise  in  hand. 

The  word  "  profit,"  as  used  in  the  act,  has  a  distinct  meaning 
and  relates  unquestionably  to  the  pecuniary  gain  to  accrue  to  each 
of  the  members  of  the  organization  who  contribute  from  their 
means  to  the  common  fund. 


Sec.  21.  Meaning  of  the  Phrase,  Having  a  Capital  Stock 
Represented  by  Shares.  —  To  bring  any  corporation,  company 
or  association  within  the  purview  of  the  Federal  Corporation  Act 
it  must  not  only  have  been  organized  for  profit,  but  in  addition 
thereto  it  must  have  a  capital  stock  represented  by  shares.  The 
phraseology  here  used  eliminates  in  itself  all  partnerships,  both 
general  and  limited  from  the  operation  of  the  act.  The  words 
"  capital  stock,"  as  here  used,  refer  to  the  money,  property  or 
services  contributed  by  the  members  of  the  corporation,  joint  stock 
Fed.  Corp.  Tax  —  5 


66  Federal  Coeporation  Tax  Law. 

company  or  association  to  the  capital  thereof,  and  is  commonly 
represented  by  shares  issued  to  such  members  at  the  inception  of 
the  particular  enterprise  to  which  such  contribution  has  been 
made.     (See  Christensen  v.  Eno,  106  N.  Y.  97,  12  N.  E.  648.) 

The  title  to  such  capital  stock  as  here  referred  to  vests  in  tho 
corporation,  joint  stock  company  or  association,  while  the  title 
to  the  shares  therein  vests  in  the  members.  (See  Van  Allen  v. 
Assessors,  3  Wall.  573,  18  L.  E.  229.) 

A  court  of  high  authority  (McGinty  v.  Athol  Reservoir  Co.,  155 
Mass.  183,  29  N.  E.  510)  has  held  that  where  no  governing  statute 
intervenes,  a  business  corporation  may  exist  without  share  owner- 
ship. (See  Malleson  v.  Gen.  Mineral  Pat.  Syndicate,  L.  R.  3 
Chan.  538.)  However,  in  the  United  States  the  rule  is  well  nigh 
universal  that  business  corporations,  joint  stock  companies  and 
unincorporated  associations  for  profit  must  and  in  practice  do 
have  a  capital  stock  represented  b^^  shares. 

Thus  the  Attorney-General  of  the  United  States  has  rendered 
an  opinion  February  14,  1910,  (see  Appendix  EE.)  to  the  effect 
that  mutual  savings  banks  having  no  capital  stock,  are  not  liable 
to  payment  of  the  federal  corporation  tax. 

So  again,  the  commissioner  of  internal  revenue,  in  his  bulletin 
dated  March  29  (T.  D.  1606,  see  Appendix  K.),  has  taken  the 
])osition  that  holding  companies  known  as  "  voting  trusts,"  re- 
ceiving only  dividends  on  stock,  but  having  no  capital  stock,  are 
not  liable  to  the  payment  of  the  tax. 

lie,  however,  took  the  position  that  corporations  organized  for 
the  purpose  of  holding  real  estate  were  subject  to  tlic  iwiyinent  of 
the  tax.  This  opinion  has  since  been  confirmed  l)y  I  lie  decision 
of  the  United  States  Supreme  Court  in  Flint  v.  Stone  Tracey  Co., 
220  U.  S.  107. 

The  commissioner  of  internal  revenue^  lins  rnlod  that  corpora- 
tions organized  to  sell  provisions,  etc.,  to  st(K'kliol(lers  are  subject 
to  the  payment  of  the  tax.  (See  T.  1).  KiOd,  March  29,  1910,  see 
Appendix  K.) 

Sec.  22.  Definition  of  Insurance  Companies  as  Used  In  the 
Act.  —  'i'hc  i'\'<l('riil  Corporal  inn  '^I'mx  Act,  after  nudging  every 
corpuraliun,    joint   stock    company    or    association    organized    for 


ScoPK  AND  Intent  of  the  Act.         67 

profit  and  having  a  capital  st(Xjk  represented  by  shares,  subject  to 
the  tax  thereby  inijwsed,  added  thereto  the  following  words  "  and 
every  insurance  company." 

As  a  majority  of  insurance  companies  are  corporations,  it  be- 
comes pertinent  to  inquire  why  insurance  companies  were  sepa- 
rately enumerated  in  the  act.  The  underlying  purpose  in  tliis 
regard  unquestionably  was  to  include  within  the  terms  of  the  act 
insurance  companies  which,  wdiile  organized  for  profit,  yet  did 
not  have  a  capital  stock  divided  into  shares.  In  order  to  under- 
stand the  full  scope  and  meaning  of  the  words  "  insurance  com- 
panies "  as  employed  in  the  act,  it  will  be  necessary  to  define 
"  insurance  "  as  therein  used. 

In  legal  acceptation,  "  insurance "  is  an  agreement  whereby 
one  party  (called  the  insurer)  for  a  valuable  consideration  (termed 
the  premium)  agrees  to  indemnify  another  (called  tlie  insured) 
in  a  stipulated  amount,  against  the  happening  of  a  designated 
event.  The  latter  may  be  the  act  of  an  individual  or  an  act  of 
God.  It  includes  all  kinds  and  classes  of  insurance  companies, 
such  as  life,  fire,  marine  guaranty,  casualty,  burglary  and  em- 
ployers' liability  companies. 

From  the  standpoint  of  the  exercise  of  the  taxing  power  of  the 
aovernment  the  benefit  to  be  derived  from  the  enumeration  of 
insurance  companies  in  the  manner  stated,  is  that  it  brings  within 
the  operation  of  the  act  all  insurance  companies  of  a  mutual 
character,  save  and  excepting  those  classes  of  mutual  companies 
excepted  from  the  operation  of  the  tax  (fraternal  beneficial  so- 
cieties, orders  or  associations  operating  under  the  lodge  system, 
and  providing  for  the  payment  of  life,  sick,  accident  and  other 
benefits  to  the  members  of  such  orders,  societies  or  associations 
and  dependants  of  such  members). 

Sec.  23.  Character  and  Purpose  of  Corporations,  Joint 
Stock  Companies  and  Associations  —  How  Determined.  —  One 

general  rule  may  be  laid  down  for  determining  the  character  and 
purpose  of  any  particular  corporation,  joint  stock  company  or 
association.  It  is  this.  Such  character  or  purpose  is  not  ordi- 
narily to  be  gained  from  the  actual  business  transacted  thereby, 
but  rather  from  the  formal  statement  of  the  character  and  pur- 


68  Federal  Corporation  Tax  Law. 

pose  of  the  orgauization,  as  set  forth  in  the  charter,  articles  of 
agreement  or  articles  of  association  of  any  such  corporation,  joint 
stock  company  or  association.  The  same  rule  should  be  applied 
here  that  has  been  so  often  invoked  successfully  in  determining 
whether  certain  corporations  come  within  the  statutory  definition 
of  certain  kinds  of  corporations,  which  are  made  subject  to  a 
designated  statutor,  liability. 

Thus,  for  example,  in  Minnesota  a  statute  exists  imposing  a 
statutory  liability  upon  all  stockholders  of  corporations  except 
those  organized  for  the  purpose  of  carrying  on  any  kind  of  manu- 
facturing or  mercantile  business.  The  Minnesota  Supreme  Court 
when  called  upon  to  determine  whether  any  particular  corpora- 
tion was  engaged  in  manufacturing  or  mercantile  business,  has 
uniformly  held  that  the  character  of  the  corporation  under  such 
circumstances  is  to  be  determined  not  by  the  kind  of  business 
actually  carried  on  by  it,  but  by  the  kind  of  business  authorized 
by  its  articles  of  incorporation.  (Minn.  Title  Ins.  Co.  v.  Regan 
et  al,  72  Minn.  431,  75  N.  W.  722;  Gould  v.  Fuller,  79  Minn. 
414,  82  N.  W.  673 ;  Senour  Mfg.  Co.  t'.  Church  Paint,  etc.,  Co., 
81  Minn.  294,  84  N.  W.  109 ;  Cuyler  v.  City  Power  Co.,  74  Minn. 
22,  76  N.  W.  948;  Nicollett  Nat.  Bank  v.  Frisk-Turner  Co.,  71 
Minn.  413,  74  N.  W.  160.) 

The  rule  here  referred  to  is  unquestionably  applicable  in  de- 
termining whether  a  particular  corporation,  joint  st<x'k  company 
or  association  comes  within  the  purview  of  the  federal  corpora- 
tion tax  enactment. 

Sec.  24.  General  Statement  as  to  Classes  of  Companies 
Excepted  From  the  Operation  of  the  Act.  —  Section  1  of  the 
Federal  (Corporation  Law  (lines  2()  to  37)  expressly  exempts  from 
the  operation  of  the  act  nil  labor,  agricultural  or  horticultural 
cor])orationa,  fraternal  lx>neficia]  societies,  orders  or  associations 
oyx'rating  under  the  lodge  system,  and  ])rovi(ling  for  llie  payment 
of  life,  sick,  iu'ciilcnt  nnd  otlicr  bciiclits  to  llio  ni(Mid)ers  of  such 
societies,  orders,  associations  imd  (l(|>(ii(l;nits  of  such  mombers, 
and  donicstic  biiiMiiiir  ;iiid  lo:iii  associations  organized  and  ope- 
rated exelusivelv  I'm-  the  iiiiitii;il  h<'iiclit  of  their  mendiers,  cor- 
porations or  nHH«>cial  ions   organi/ed    and    M|i(ialcd    cxclnsivclv    fcr 


Scope  and  Intent  of  the  Act.         69 

religious,  charitable  or  educational  purposes,  no  part  of  the  net 
income  of  which  inures  to  the  benefit  of  any  private  stockholder  or 
individual. 

It  should  be  observed  that  owing  to  the  plain  wording  of  the 
provision  of  the  act  here  referred  to,  any  one  of  the  excepted 
organizations  named  above  if  not  organized  for  profit  yet  may 
have  a  capital  stock  represented  by  shares  and  still  not  be  subject 
to  the  tax  imposed  by  the  act. 

In  order  to  determine  specifically  just  what  organizations  are 
excluded  from  the  operation  of  the  federal  corporation  excise  tax, 
it  will  now  be  necessary  to  construe  each  of  the  excepted  organiza- 
tions separately. 

It  should  be  clearly  borne  in  mind  that  the  tax  imposed  by  the 
Federal  Corporation  Tax  Act  applies  to  all  corporations,  joint 
stock  companies  and  associations  described  therein,  except  those 
specifically  exempted,  without  reference  to  the  kind  of  business 
carried  on.  (T.  R.  March  29,  No.  1606,  see  Appendix  K.)  Any 
person  claiming  special  exemption,  must,  nevertheless,  maice  the 
return  required  by  the  act,  accompanied  by  a  statement,  setting 
forth  the  ground  on  which  exemption  is  claimed.  (T.  R.  March 
29,  1910,  No.  1606.) 

National  banks  do  not  come  within  any  of  the  exemptions  named 
in  the  Federal  Corporation  Tax  Act.  (T.  R.  March  29,  1910, 
No.  1606.  See  opinion  of  the  United  States  Supreme  Court  in 
Eliot  V.  Freeman  et  al.,  220  U.  S.  178;  Zonne  v.  Minneapolis 
Syndicate  et  al,  220  U.  S.  187). 

Sec.  25.  Definition  of  Labor  Organizations.  —  A  labor 
organization  is  an  association  of  individuals  engaged  in  the  trades 
and  formed  for  the  protection  and  promotion  of  the  interests  of 
the  members  thereof,  with  a  view  to  securing  improved  wage  and 
labor  conditions. 

Sec.  26.  Definition     of     Agricultural     Organizations.  —  An 

agricultural  organization  is  an  association  of  individuals  engaged 
in  farming  occupations,  formed  for  the  protection  and  promotion 
of  the  interests  of  the  members  thereof,  with  a  view  to  securing 


70  Federal  Corporation  Tax  Law. 

improved  methods  in  their  work  as  well  as  to  promote  the  financial 
and  social  welfare  of  the  members. 

The  commissioner  of  internal  revenue,  in  his  bulletin  dated 
March  29,  1910  (T.  R  No.  1606,  see  Appendix  K.),  has  made 
the  following  rulings,  relative  to  the  above  corporations: 

1st.  Corporations  owning  sugar  or  other  plantations  and  dis- 
posing of  the  products  thereof,  are  not  entitled  to  exemption  from 
the  payment  of  the  federal  corporation  tax  as  agricultural  cor- 
porations. 

2d.  Co-operative  dairies,  not  issuing  stock,  and  allowing  pa- 
trons dividends  based  on  butter  fat  in  milk,  are  not  liable  to  the 
payment  of  the  tax. 

3d.  Mutual  Hail  Associations  are  not  to  be  regarded  as  agricul- 
tural associations,  and  are  therefore,  subject  to  the  payment  of 
the  tax. 

4th.  Agricultural  organizations  are  not  exempted  from  the  pay- 
ment of  the  federal  corporation  tax  unless  their  chief  object  is  the 
promotion  or  advancement  of  agricultural  interests,  and  no  part 
of  the  net  income  thereof  inures  to  the  benefit  of  their  stock- 
holders. 

Sec.  27.  Definition     of    Horticultural    Organizations.  —  An 

horticultural  organization  is  an  association  of  individuals  engaged 
in  gardening  occupations  formed  for  the  protection  and  promotion 
of  the  interest  of  the  members  thereof,  with  a  view  to  securing 
improved  methods  in  their  work  as  well  as  to  promote  the  financial 
and  social  welfare  of  the  members. 

As  to  what  constitutes  "  horticulture  "  attention  is  called  to  tlie 
remarks  thereon  of  Mr.  Bailey  in  his  Cyclojxidia  of  Ajnerican 
Horticulture,  as  follows: 

Ilorticiilttirf  ih  tho  prnwing  of  floworH.  fniits,  vopptnbloa,  iind  all  plants  for 
ornuiiurit  and   fancy. 

IfortiPiilturn  ilividos  it.sclf  into  four  sompwlmt  co-ordinnte  hnincheH. 
Annal8   Ilort.    18«1,    12r)-T30. 

PoinoIr)f.'y,  or  tho  f;ro\vinp  of  frnits.  Oloricnlfnro,  or  vopcfahlo  fjardcTiinpf. 
Floriculture,  or  IIh-  raiHiiifj  of  ornanionlal  jilanis  for  tlu'ir  individual  uhch  or 
for  thoir  protoction.  LandHcnpo  horticullun',  nr  tlio  growing  of  plants  for 
their  UBe  in  tho  landHcapo,  or  in  landHcapo  gardening. 


Scope  and  Intent  of  the  Act.         71 

Sec.  28.  Definition    of    Fraternal    Beneficial    Societies.  —  A 

fraternal  beneficial  society  is  an  organization  fonne<l  for  the 
exclusive  benefit  of  its  members  and  beneficiaries,  usually  organ- 
ized under  a  lodge  system  more  or  less  secret  in  its  form  of  work. 
In  practice  such  organizations  are  accompanied  by  a  mutual 
benefit  insurance  feature,  providing  for  the  payment  of  benefits 
in  case  of  the  death  of  any  of  the  members. 

Sec.  29.  Legal  Effect  of  Excluding  From  the  Operation  of 
the  Act  Certain  Classes  of  Fraternal  Beneficial  Organizations 
and  Societies.  —  In  order  to  entitle  a  fraternal  beneficial  society 
to  claim  exemption  from  the  operation  of  the  Federal  Corporation 
Tax  Law  it  must  not  only  operate  under  the  lodge  system,  but 
must  further  provide  for  the  payment  of  life,  sick,  accident  and 
other  benefits  to  members  or  dependants  of  members. 

In  view  of  the  language  here  employed  attention  is  called  to 
the  meaning  of  the  words  "  operating  under  the  lodge  system." 
Under  the  ruling  of  the  commissioner  of  internal  revenue  (March 
29,  1910,  T.  R,  No.  1606,  see  Appendix  K.),  the  exemption  from 
the  payment  of  the  federal  corporation  tax  in  favor  of  fraternal 
beneficial  associations  does  not  apply  to  mutual  fire  insurance 
companies. 

Sec.  30.  What  Is  In  Fact  the  Lodge  System.  — The  Federal 
Corporation  Tax  Law  excludes  from  the  operation  thereof  only 
those  fraternal  beneficial  societies,  orders  or  associations  which 
operate  under  the  lodge  system,  and  provide  a  mutual  benefit  in- 
surance feature  for  their  members.  The  lodge  system  here  re- 
ferred to  is  the  one  which  characterizes  nearly  all  of  the  great 
fraternal  orders  which  exist  in  the  United  States,  such  for  ex- 
ample, as  the  "  Odd  Fellows,"  "  Masons,"  "  Knights  of  Pythias," 
"  Order  of  the  Macabees,"  "  Modern  Woodmen,"  "  Elks,"  etc. 

The  lodge  system  mentioned  in  the  act  has  reference  to  the 
custom  in  general  use  in  this  country  whereby  membership  in  any 
of  these  organizations  can  be  obtained  only  through  admittance  to 
some  local  body  called  a  lodge  or  chapter,  which  in  its  turn  must 
have  secured  charter  from  some  proper  source  of  authority. 


72  Federal  Corporation  Tax  Law. 

Sec.  31.  Meaning  of  the  Phrase  "  Providing  for  the  Pay«= 
ment  of  Life,  Sick,  Accident  and  Other  Benefits  to  the  Mem= 
bers  of  Such  Societies,  Orders  and  Associations  and  Depend- 
ants of  Such  Members."  —  The  phrase  found  in  section  1  of  the 
Federal  Corporation  Tax  Law,  to  wit :  ''  Providing  for  the  pay- 
ment of  life,  sick,  accident  and  other  benefits  to  the  members  of 
snch  societies,  orders  and  associations  and  dependants  of  such 
members,"  is  merely  intended  to  convey  the  meaning  that  only 
such  fraternal  organizations  operating  under  the  lodge  system  as 
make  mutual  benefit  insurance  a  distinct  and  inseparable  part  of 
the  purposes  for  which  they  are  organized,  shall  be  exempt  from 
the  payment  of  the  corporation  excise  tax  which  is  imposed  upon 
those  insurance  companies  which  are  not  an  adjunct  of  some 
fraternal  organization. 

Sec.  32.  Definition    of    Building    and    Loan    Association. — 

Building  and  loan  associations  are  organizations  usually  corporate 
in  form,  the  primary  purpose  of  which  is  to  accumulate  a  fund 
by  means  of  dues  from  its  members,  and  from  other  sources, 
out  of  which  investments  may  be  made  from  time  to  time  in  the 
form  of  loans  to  members  exclusively  upon  the  payment  of  an 
agreed  rate  of  interest,  and  sometimes  of  a  premium  in  addition 
thereto.  (See  Rhodes  v.  Mo.  Sav.  &  Loan  Co.,  173  111.  621,  50 
K  E.  998;  Cook  v.  Equitable  Assn.,  104  Ga.  814.) 

Sec.  33.  Meaning  of  the  Phrase,  "Organized  and  Operated 
Exclusively  for  the  Mutual  Benefit  of  Their  Members."— An 

examination  of  the  cluirter,  constitution  and  by-laws  of  any  build- 
ing and  loan  association,  whether  national  or  IocmI  in  its  scope, 
will  serve  to  show  that  mutuality  is  in  ;ill  cases  the  essential  ])rin- 
eipal  thereof.      (See  Schell  v.  Eqnit.    L)an,  etc.,  Assn.,   150   Mo. 

10.3,  r,\  s.  W.  km;.) 

It  was  niMlniihicdlv  the  recognition  of  this  prin('ii)lo  which  led 
Congress  t<>  cxtciMl  tlio  ex(Mii]iti'>ii  fmin  ihc  ojMM-ation  of  t]u> 
Fcfleriil  r,,r[)Mnitinii  T;ix  i>:iw  (inly  \n  those  associations  "organ- 
ized and  operated  exclusively  for  the  ninliial  Ix^nefit  of  tluMr 
nieinliers." 


ScoPK  AND  Intent  of  the  Act.         73 

Building  and  loan  associations  are  not  exempted  from  the  pay- 
ment of  the  tax,  if  they  have  a  capital  stock,  and  loan  to  others 
than  members,  thus  doing  a  business  akin  to  a  banking  business. 
(T.  R.  No.  IGOO,  March  29,  1910,  see  Appendix  K.)  So  buihi- 
ing  and  loan  associations,  issuing  stock  upon  which  dividends  are 
guaranteed,  are  liable  to  the  payment  of  the  federal  corporation 
tax.     (T.  R.  March  29,  1910,  No.  1606,  see  Appendix  K.) 

Sec.  34.  Definition  of  Religious  Corporations  and  Associa- 
tions. —  A  religious  corporation  or  association  is  an  organization 
formed  under  statutory  authority  for  the  purpose  of  promoting 
the  spiritual  and  moral  welfare  of  its  members,  as  well  as  to 
afford  a  legal  method  for  the  protection  of  title  to  such  property 
as  may  have  been  acquired  for  the  benefit  of  such  members 
through  the  medium  of  permitting  the  title  to  such  properties  to 
vest  in  the  organization  rather  than  in  the  members  as  tenants  in 
common.  Such  an  organization  is  peculiarly  necessary  in  view 
of  the  changing  character  of  religious  congregations  as  well  as 
owing  to  the  fact  that  belief  in  some  creed  or  system  of  church 
government  is  usually  the  motive  which  induces  membership  in 
such  organization. 

The  phrase,  "  religious  organization,"  has  a  very  broad  and 
catholic  meaning,  and  includes  not  only  what  are  commonly 
known  as  "  church  organizations,"  but  includes  as  well  Young 
Men's  Christian  Associations,  Societies  for  Ethical  Culture,  and 
any  organization  authorized  by  statute  which  has  for  its  essential 
purpose  the  moral  and  spiritual  uplifting  of  man. 

Sec.  35.  Definition  of  Charitable  Organizations  and  Asso- 
ciations. —  A  charitable  organization  or  association  is  one  which 
is  founded  for  altruistic  purposes  and  is  not  designed  to  advance 
the  pecuniary  or  social  interests  of  its  organizers  or  members.  In 
practice  this  purpose  is  the  distribution  of  pecuniary  aid  in  the 
form  of  shelter,  food,  medicine,  surgical  or  medical  treatment  to 
such  persons  as  may  see  fit  to  make  use  of  them  under  the  con- 
ditions upon  which  they  are  offered. 

All  such  charitable  associations  as  are  referred  to  in  the  federal 
corporation  tax  must  be  of  eleemosynary  character,  but  the  fact 


74  Federal  Corporation  Tax  Law. 

that  they  may  receive  pay  for  services  rendered  will  not  deprive- 
them  of  the  right  to  claim  that  they  are  excluded  from  the  ope- 
ration of  the  act.  (See  Powers  v.  Mass.  Homeopathic  Hos.,  109 
Fed.  294,  47  C.  C.  A.  122.) 


Sec.  36.  Definition  of  Educational  Corporations  and  Asso- 
ciations. —  An  educational  corporation  or  association  is  one 
organized  under  statutory  authority  for  the  purpose  of  developing 
either  along  narrow  or  broad  lines  mental  and  manual  capabilities 
of  human  beings.  (See  O'Day  v.  People,  171  Ilh  293,  49  N.  E. 
504;  N.  St.  Louis  Gymnastic  Society  v.  Hudson,  85  Mo.  32;  Mt. 
Hermon  Boys  School  v.  Gill,  145  Mass.  139,  13  N.  E.  354;  Cook 
V.  State,  90  Tenu.  407,  16  S.  W.  417.) 


Sec.  37.  Meaning  of  the  Phrase,  "  No  Part  of  the  Net  In- 
come of  Which  Inures  to  the  Benefit  of  Any  Private  Stock- 
holder or  Individual." — It  should  be  noted  that  only  those 
religious,  charitable  or  educational  corporations  or  association» 
are  specifically  exempted  from  the  operation  of  the  Federal  Cor- 
poration Tax  Law  whose  entire  not  income  is  devoted  to  the 
accomplishment  of  some  public  benefit,  and  no  part  of  which 
inures  to  the  benefit  of  any  private  stockholder  or  individual. 
(See  act.  Appendix  A,  lines  35-37.)  The  meaning  of  this  limita- 
tion is  quite  clear.  Congress  evidently  intended  by  inserting  the 
clause  in  question  to  refuse  to  exempt  from  the  ojwration  of  the 
Corporation  Excise  Tax  Law  any  so-called  "  eloemosynary  "  in- 
stitution which  contemplated  in  any  degree  financial  benefit  to 
private  stwkholdors  or  individuals.  Thus  hos]>itals  and  sani- 
tariums organized  for  private  pur])oses,  or  schools  the  net  in- 
come of  which  would  ultimately  go  into  the  pockets  of  the  stock- 
holders or  individuals,  are  excluded  from  the  benefit  of  the  exemp- 
tioii  extended  to  thfKse  organizations  which  are  operated  exclusively 
for  the  l)enefit  of  the  public.  (As  to  the  existence  of  other  exemp- 
tions from  the  oj>eration  of  the  federal  corporation  tax,  other  than 
those  specifically  enumerated  in  the  act,  sec  opinion  of  United 
States  Supreme  Court  in  Kliot  v.  Freeman  ri  al,  220  II.  S.  178, 
and  Zonne  v.  Minn(!aj>oli.s  Syn.  et  al.,  220  U.  S.  1H7.) 


Scope  and  Intent  of  the  Act.         76 

Sec.  38.  Are  Corporations  Organized  or  Dissolved  Within 
the  Year  for  Which  the  Federal  Corporation  Tax  Is  Levied, 
Subject  to  the  Payment  Thereof? — It  is  entirely  clear  that  all 
corporations  organized  within  the  preceding  fiscal  year  as  pre- 
scribed in  the  Federal  Corporation  Tax  Enactment  are  subject  to 
the  payment  of  the  excise  tax  therein  levied,  provided  the  facts  as 
disclosed  by  the  return  of  such  corporations,  show  that  such  a  tax 
is  due. 

Again,  the  mere  fact  that  a  corporation  has  been  legally  dis- 
solved under  some  State  statute  within  the  same  period  of  time 
does  not  exempt  such  dissolved  corporation  from  the  payment  of 
the  corporation  excise  tax  provided  such  tax  would  have  become 
due  had  dissolution  not  taken  place.  This  on  the  same  principle 
which  has  induced  the  federal  courts  to  hold  that  notwithstanding 
the  dissolution  of  a  State  corporation  by  the  State  court  it  may 
nevertheless  be  adjudged  a  bankrupt  under  the  National  Bank- 
ruptcy Act.  (In  re  Mer.  Ins.  Co.,  Federal  Cases  9441 ;  In  re  In- 
dependent Ins.  Co.,  Fed.  Cases  7018.) 

Where  a  company  has  been  dissolved  and  the  required  return 
is  not  made  by  its  officers,  such  return  will  be  prepared  by  the 
commissioner  of  internal  revenue  and  the  tax  assessed  thereon,  the 
same  as  if  the  report  had  been  regularly  made.  (T.  R.  March  29, 
1910,  No.  1606,  see  Appendix  K.). 

The  Treasury  Department  has  ruled  that  all  corporations 
organized  during  the  tax  year,  or  going  into  liquidation  during 
such  period,  should  nevertheless  render  a  sworn  return  on  the  sub- 
scribed form.  The  tax  imposed,  however,  is  held  by  the  Treasury 
Department  not  to  apply  to  corporations  which  went  out  of  exist- 
ence prior  to  the  passage  of  the  act.  (T.  D.  March  29,  1910,  No. 
1606,  see  Appendix  K.) 

In  this  connection  attention  is  called  to  the  opinion  of  the 
Attorney-General,  under  date  of  April  2,  1910:  (See  Appendix 
IT.) 

First.  Whether  or  not  such  corporation  is  liable  for  the  excise  tax  created 
by  said  section  38  of  the  Act  of  August  5,  1909  *  *  *  In  answer  to  this 
question  I  will  say: 

1.  In  the  first  clause  of  section  .38,  Act  of  August  .'5,   1909   (Stat.  ).  it 

is  provided  "  that  every  corporation  •  *  •  ^ow  or  hproaft*>r  nrsani/ed 
under  the  laws  of  the  United  States  or  of  any  State     •     •     •     sliall  be  sub- 


76  Federal  Corporation  Tax  Law. 

ject  to  pay  annually  a  special  excise  tax  with  respect  to  the  carrying  on  or 
doing  business  by  such  corporation  *  *  *  equivalent  to  one  per  centum 
of  the  entire  net  income  over  and  above  $5,000  received  by  it  from  all  sources 
during  such  year."  That  is  the  tax  payable  annually,  and  it  is  imposed  "  with 
respect  to  the  carrying  on  or  doing  business  by  such  corporation,"  and  the 
amount  of  tax  is  fixed  at  one  per  centum  upon  its  net  income  above  $5,000 
received  during  such  year  —  that  is,  the  year  during  which  the  business  is 
transacted  with  reference  to  which  the  tax  is  imposed.  By  the  third  para- 
graph it  is  provided  that  the  income  of  the  corporation  shall  be  computed  for 
the  vear  ending  December  31,  1909,  and  for  each  calendar  year  thereafter. 
Therefore,  tlie  assessment  of  the  tax  is  always  for  the  year  preceding  its 
collection  and  not  for  the  year  within  which  the  collection  is  made,  and  the 
present  assessment  is  for  the  year  1909.  It  follows,  therefore,  that  any  cor- 
poration which  was  engaged  in  business  after  the  approval  of  the  act  on 
August  5,  1909,  is  amenable  to  this  tax. 

In  Pennsylvania,  etc.,  Company  et  al.  v.  New  York  City  Rail- 
way et  al.,  176  Fed.  471,  the  court  spoke  as  follows: 

The  receivers  ask  instructions  as  to  what  action,  if  any,  they  shall  take 
under  Act  August  5,  1909,  c.  6,  36  Stat.  112  (U.  S.  Comp.  St.  Supp.  1909, 
844),  referring  to  section  38,  which  provides  for  special  excise  tax  upon  net 
income  of  certain  corporations,  joint  stock  companies,  and  associations.  The 
act  contains  no  provisions  as  to  receivers,  and  it  is  not  felt  that  Congress  in- 
tended to  include  bankrupt  corporations  without  any  net  income  whose  prop- 
erties are  being  administered  by  a  court.  It  would  seem  to  be  sufficient  if  at 
the  time  fixed  they  make  a  return  and  statement  to  be  filed  with  the  proper 
officer  showing  that  tlu'se  roads  are  in  the  hands  of  receiveds.  Whether  the 
various  railway  companies  are  or  are  not  within  the  terms  of  the  act  as  cor- 
porations carrying  on  business  and  receiving  a  net  income,  is  a  question  which 
they  will  of  course  determine  for  themselves  upon  the  advice  of  their  counsel. 
Whether,  if  this  tax  l)e  properly  assessed  upon  them  should  be  paid  by  the 
receiver  or  lessee,  is  a  question  to  be  determined  when  it  may  arise.  Such 
determination  will  be  in  no  way  affected  by  the  present  decision  since  "  prac- 
tical construction  as  to  such  tax  cannot  be  shown." 

Sec.  39.  Definition  of  Foreign  Corporations.  —  The  phrase 
'*  foroif^n  corporation  "  as  employed  in  the  Federal  Corporation 
Tax  Law  inchides  any  corporation,  joint  stock  company  or  associa- 
tion not  orfjanizod  under  the  laws  of  the  United  States  or  of  any 
State  or  Territory  of  the  United  States  or  of  tlie  Act  of  Congress 
applicable  to  Alaska  or  the  District  of  Colmuhia. 

"  Companies  organized  under  the  laws  of  the  United  States  " 
has  reference  to  those  cor])arations  whicli  are  specifically  created 
by  an  Act  of  Congress  and  d(X\s  not  include  corporations  organized 
under  a  general  and  enabling  Act  of  Congress  extending  to  execu- 


Scope  and  Intent  of  the  Act. 


i  I 


tive  heads  or  subordinate  legislative  bodies  located  in  the  jwsses- 
sions  of  the  United  States,  the  right  at  their  option  to  authorize 
the  creation  of  corporations,  joint  stock  companies  or  associations. 

The  word  "  territory  "  as  used  in  this  immediate  connection 
undoubtedly  has  reference  to  Alaska,  Arizona  and  New  Mexico 
and  possibly  Hawaii,  and  does  not  include  the  possessions  of  the 
United  States,  such  as  Porto  Rico,  the  Philippine  Islands,  Guam 
or  the  Island  of  Tutuila.  Were  this  not  so,  there  would  have  been 
no  occasion  to  so  specifically  refer  in  the  act  to  those  corporations, 
joint  stock  companies  or  associations  "  organized  under  the  Acts 
of  Congress,  applicable  to  Alaska  or  the  District  of  Columbia." 

The  Treasury  Department  has  made  a  specific  ruling  that  com- 
panies organized  in  Porto  Rico  and  not  engaged  in  business  in 
the  United  States  are  not  subject  to  the  payment  of  the  federal 
corporation  tax.  (T.  R.  March  29,  1910,  No.  1606,  see  Appendix 
K) 

Sec.  40.  What  Foreign  Corporations  Are  Subject  to  the 
Payment  of  the  Federal  Corporation  Tax  Law.  —  Only  those 
corporations,  joint  stock  companies  or  associations  organized  for 
profit,  and  having  a  capital  stock  represented  by  shares  organized 
under  the  laws  of  any  foreign  country  and  engaged  in  business  in 
any  State  or  Territory  of  the  United  States  or  in  Alaska,  or  in 
the  District  of  Columbia,  are  subject  to  the  payment  of  the 
federal  corporation  excise  tax.  Here  again,  the  word  "  territory  " 
undoubtedly  has  reference  to  Arizona  and  New  Mexico,  and  does 
not  apply  to  the  other  territorial  possessions  of  the  United  States. 

The  Attorney-General  in  his  opinion  rendered  March  9,  1910 
(see  Appendix),  had  occasion  to  go  into  the  question  as  to 
Avhether  foreign  steamship  companies,  owning  vessels  plying  be- 
tween American  and  foreign  ports,  are  subject  to  the  payment  of 
the  federal  corporation  tax.     This  opinion  reads  as  follows : 

SIR:  —  I  have  the  honor  to  acknowledge  receipt  of  your  communication  of 
January  28,  1910,  in  which  you  inquire  whether,  in  my  opinion,  foreign  steam- 
ship companies  engaged  in  the  business  of  ocean  transportation  of  passengers, 
freight,  and  mails  in  ships  owned  by  them  plying  between  Amorioa  and  for- 
eign ports,  which  companies  maintain  agencies  in  this  country  wliere  passpTijer 
tickets  may  be  bought  and   freight  received  for   transportation,   are  corpora- 


78  Federal  Corporation  Tax  Law. 

tions  subject  to  the  special  excise  tax  provided  by  the  Act  of  August  5,  1909 
(36  Stat.   112). 

The  act  in  question  is  by  its  provisions  made  applicable  to  all  corporations 
organized  under  the  laws  of  any  foreign  country  which  receive  an  income  from 
business  transacted  and  capital  invested  within  the  United  States.  But  it  is 
first  insisted  upon  the  part  of  these  steamship  companies  that,  inasmuch  as 
the  receiving  and  discharging  of  cargoes  and  passengers  is  a  mere  incident  in 
the  transportation  of  their  cargoes  and  passengers  over  the  high  seas,  they 
have  no  income  derived  from  business  transacted  in  the  United  States. 

I  am  of  the  opinion  that  this  contention  cannot  be  maintained.  These  com- 
panies have  a  large  amount  of  capital  invested  in  wharves,  warehouses,  and 
other  facilities  essential  to  carrying  on  their  business  in  this  country.  Their 
business  consists  entirely  in  transporting  passengers  and  goods  and  merchan- 
dise between  ports  in  this  country  and  those  of  foreign  countries,  and  receiving 
and  discharging  the  same.  Through  agents  located  here  all  contracts  and 
arrangements  incident  to  such  a  business  at  this  end  of  their  lines  are  made, 
and  all  exports  are  delivered  to  their  warehouses  and  are  loaded  upon  their 
vessels,  and  the  passengers  embark,  while  they  are  within  the  limits  of  the 
United  States;  and  likewise  while  here  their  imports  are  unloaded  and  pas- 
sengers from  foreign  ports  disembark.  If  these  companies  do  not  transact 
business  in  the  United  States,  they  transact  no  business  in  any  foreign  port, 
and  their  entire  business  is  carried  on  upon  the  high  seas.  To  such  a  con- 
clusion I  am  imable  to  give  assent. 

It  is  next  insisted  that,  inasmuch  as  they  are  engaged  in  the  transportation 
of  exports,  the  tax  in  question  is  a  tax  upon  exports,  and  that  the  legislation 
is  void  as  to  them  under  that  clause  of  section  fl,  article  1,  of  the  Constitution, 
which  provides  that  "  no  tax  or  duty  shall  be  laid  on  articles  exported  from 
any  State."     In  support  of  this  contt'ntion  the  following  cases  are  cited: 

Brown  r.  Maryland,  12  Wheat.  419,  wherein  the  Supreme  Court  had  under 
consideration  a  section  of  an  act  passed  by  the  Legislature  of  Maryland,  which 
provided : 

"  That  all  importers  of  foreign  articles  or  commodities,  of  dry  goods,  wares 
or  morohandiso,  hy  bale  or  package,  or  of  rum.  wine,  brandy,  whisky  and  other 
distillfii  spirituous  liquors,  etc.,  and  other  persons  selling  the  same  by  whole- 
sale, hah'  or  (lackage,  hogshead,  barrel  or  tierce,  shall,  before  they  are  author- 
ized to  sell,  tak'^  out  a  license,  as  by.  the  original  act  is  directed,  for  which 
they  shall  j)ay  fifty  dollars." 

The  cdurt  held  that  this  section,  in  so  far  as  it  applied  to  importers,  was 
invajirl,  l)ffans<-  it  was  in  efTect  a  tax  levied  by  the  State  upon  imports,  which 
under  the  Constitution  was  prohibited. 

Almv  r.  California,  24  TIow.  IdO,  wherein  it  was  held  that  an  act  passed  to 
provid<'  rovfiim-  from  a  stamp  tax  on  bills  of  lading  for  tlie  transportation  from 
any  [mint  or  place  in  that  State  to  any  point  or  placi*  without  the  State  of 
gold  or  siIv«T  coin,  gold  dust,  gold  or  silver  in  bars  or  other  form,  and  which 
required  that  sueh  stamp  be  attached  to  every  such  bill  of  lading  or  stamped 
thiTcon  was  invalid  because  it  was  the  inijiosition  of  a  tax  upon  <'\ports. 

Fairbanks  v.  United  States,  ISl  U.  S.  283,  wherein  it  was  held  that  the 
stamp  tax  on  a  fr)reign  bill  of  lading  provided  for  by  the  act  of  .Tune  13,  1808, 
wnH  e(iiiivalent  to  a  tax  on  the  articles  for  which  the  hills  wer<'  given,  and  wan 
violative  of  the  above  quoU-d  provision  of  the  Constitution. 


Scope  and  Intknt  of  the  Act.  79 

I  am  of  the  opinion  that  the  principles  decided  in  these  cases  are  not  appli- 
cable to  tlie  .statute  now  uikUt  consideration.  The  tax  imposed  by  this  act  is, 
as  declared  tlierein,  "  a  special  excise  tax  witli  resiK;ct  to  the  carrying  on  or 
doing  business  "  by  the  corporation ;  and  1  held  in  an  opinion  transmitted  to 
you  on  -January  13,  1910,  that  it  is  not  a  tax  on  the  property  owned  by  the 
corporation,  or  upon  tlie  income  from  such  property,  but  is  in  tiie  strict  and 
constitutional  sense  an  excise  tax;  and  that,  for  that  reason,  the  income  from 
the  interest  on  United  States  bonds  sliould  be  computed  in  the  gross  income 
of  a  corporation,  and  should  not  be  excluded  in  ascertaining  its  net  income. 
If  I  was  rigiit  in  tliat  conclusion,  then  this  tax  is  not  imposed  upon  exports 
carried  by  these  steamship  companies,  or  even  upon  the  income  derived  from 
the  transportation  of  such  exports. 

But,  a.side  from  this,  I  tiiink  there  is  a  very  material  distinction  between 
the  present  act  and  those  involved  in  the  cases  above  cited.  The  passengers 
carried  by  these  companies  are  not  exports  within  the  meaning  of  this  clause 
of  the  Constitution.  Crandall  v.  Nevada,  6  Wall.  35.  And  Congress  has 
express  power  to  tax  imports.  Consequently  the  revenues  of  these  companies 
are  derived  from  different  classes  of  business,  the  larger  portion  of  which  is 
subject  to  taxation.  The  act  does  not  undertake  in  its  terms  to  make  any 
distinction  between  the  different  kinds  of  business  in  which  these  or  any  other 
corporations  embraced  therein  are  engaged,  but  the  tax  is  imposed  upon  them 
all  alike,  not  as  exporters  of  merchandise,  but  as  an  incident  to  their  entire 
business.     Such  were  not  the  facts  in  either  of  the  cases  cited. 

In  Brown  t'.  ifaryland  but  two  classes  of  persons  were  mentioned  in  the  act. 
one  importers  of  the  articles  designated,  and  the  other  wholesale  dealers  in 
those  articles;  and  under  its  provisions  an  importer  was  required  to  pay  the 
tax  before  a  sale  of  the  imported  articles  could  be  made,  regardless  of  the  size 
of  the  article  or  the  amount  sold.  The  act  therefore  imposed  the  tax  upon  the 
importer  as  such,  he  being  subjected  thereto  solely  because  he  was  the  re- 
cipient for  sale  of  imported  articles.  A  careful  analysis  of  the  reasoning  of 
the  court  will  show  that  the  decision  was  rested  upon  this  fact.  In  suppoit 
of  the  holding  that  the  prohibition  to  tax  the  imported  articles  does  not  cease 
the  moment  it  lands,  the  court  used  the  following  illustrations: 

"The  United  States  have  the  same  right  to  tax  occupations  which  is  pos 
sessed  by  the  States.  Now,  suppose  the  United  States  should  require  every 
exporter  to  take  out  a  license,  for  which  he  should  pay  such  tax  as  Congress 
might  think  proper  to  impose;  would  the  government  be  permitted  to  shield 
itself  from  the  just  censure  to  which  this  attempt  to  evade  the  prohibitions  ot 
the  Constitution  would  expose  it  by  saying  that  this  was  a  tax  upon  the 
person,  not  on  the  article,  and  that  the  legislature  had  a  right  to  tax  occupa- 
tions? Or,  suppose  revenue  cutters  were  to  be  stationed  off  the  coast  for  the 
purpose  of  levying  a  duty  on  all  merchandise  found  in  vessels  which  were 
leaving  the  United  States  for  foreign  countries,  would  it  be  received  as  an 
excuse  for  this  outrage  were  the  government  to  say  that  exportation  nio:int  n.) 
more  than  carrying  goods  out  of  the  country,  and  as  the  prohibition  to  lay  «i 
tax  on  imports  or  things,  imported  ceased  the  instant  they  were  brouglit  into 
the  country,  so  the  prohibition  to  tax  articles  exported  ceased  when  they  were 
carried  out  of  the  country?  "      (Page  444.) 

It  will  be  observed  that  the  first  illustration  deals  with   the   exporter  ag 


80  Federal  Cokpoeation  Tax  Law. 

such,  while  the  second  deals  directly  with  the  exported  article  while  in  trans- 
portation. But  the  distinction  is  more  clearly  drawn  in  answering  the  con 
tention  that  if  the  act  be  invalid,  then  an  importer  could  without  being  sub- 
ject to  a  tax  imposed  by  the  iState,  sell  his  goods  either  as  retailer  or  peddler;' 
or  that  silver  plate  imported  for  his  own  use  would  not  be  subject  to  taxa- 
tion.    The  court  upon  this  subject  said: 

"This  indictment  is  against  the  importer,  for  selling  a  package  of  dry- 
gui/ds,  in  the  form  in  which  it  was  imported,  without  a  license.  This  state 
of  things  is>  changed  if  he  sells  them  or  otherwise  mixes  them  with  the  general 
property  of  the  State,  by  breaking  up  his  packages,  and  traveling  with  them 
as  an  itinerant  peddler.  In  the  first  case  the  tax  intercepts  the  import,  as  an 
import,  in  its  way  to  become  incorporated  with  the  general  mass  of  property, 
and  denies  it  the  privilege  of  becoming  so  incorporated,  until  it  shall  have 
contributed  to  the  revenue  of  the  State.  It  denies  to  the  importer  the  right 
of  using  the  privilege  which  he  has  purchased  from  the  United  States  until 
he  shall  have  also  purchased  it  from  the  State.  In  the  last  cases  the  tax 
finds  the  article  already  incorporated  with  the  mass  of  property  by  the  act 
of  the  importer.  He  has  used  the  privilege  he  had  purchased,  and  has  him- 
self mixed  them  up  with  the  common  mass,  and  the  law  may  treat  them  as  it 
finds  them.  The  same  observations  apply  to  plate  or  other  furniture  used  by 
the  importer.     So,  if  he  sells  by  auction."      (Page  442.) 

Therefore  the  same  article  in  the  hands  of  the  same  person  may  be  taxable 
or  not,  according  to  whether  it  still  retains  the  character  of  an  import. 

So,  in  the  other  cases  cited,  the  stamp  tax  was  attached  to  the  bill  of  lad- 
ing, which  accompanied  the  exported  article,  and  was.  by  the  language  of  the 
acts,  made  applicable  to  exports  as  such. 

On  the  other  hand,  in  Turpin  th  Burgess,  117  U.  S.  504,  it  was  held  that 
a  stamp  required  lo  be  fixed  to  every  package  of  tobacco  intended  for  exporta- 
tion, before  its  removal  from  the  factory,  was  constitutional  because  the  to- 
bacco had  not  become  an  article  of  export;  and  in  discussing  the  question 
in  referring  to  the  two  clauses  of  the  Constitution  wherein  taxes  upon  exports 
are  prohibited,  and  the  States  are  proliibitod  from  imposing,  without  the  con- 
sent of  Congress,  taxes  upon  imports,  the  court  said: 

'■  The  prohibition  in  both  cases  has  reference  to  the  imposition  of  duties  on 
goods  by  reason  or  because  of  their  being  exportation  or  intended  exportation, 
or  while  they  are  being  exported.  That  would  bo  laying  a  tax  or  duty  on 
exports  or  on  articles  exported  within  the  moaning  of  the  Constitution,  but  ii 
general  tax  laid  on  all  property  alike,  and  not  levied  on  goods  in  course  of 
exportation  or  because  of  their  intended  exportation,  is  not  within  the  Con- 
stitution proiiibition."      (Page  .'iOT.) 

And  in  Cornell  r.  Coyne,  192  U.  S.  418,  wherein  it  was  held  that  filled 
cheefie  was  not  exempted  from  taxation  under  this  clause  of  the  Constihition 
l)ecau8e  manufactured  expressly  for  exportation,  the  court  quoted  with  ap- 
proval the  foregoing  language  of  the  court  in  Turpin  v.  Burgess. 

It  appears,  therefore,  that  the  validity  of  an  art,  und<'r  this  clause  of  the 
rV)nstitution,  wliioh  taxes  an  article,  depends  not  upon  wlM'ther  it  will  increase" 
flio  priff  of  <h('  arficlf  wlii-n  <'xp<)rt<'il,  liut  whether  ii  is  faxed  jis  an  export. 
In  like  manner  and  for  the  sain<'  reason  tli<'  validity  of  a  tax  inipnsod  upon  a 
business   depends   not  uj)oii   the    fact   tliat.    incidentally,   along   with    its   other 


Scope  and  Intent  of  the  Act.         81 

business,  the  concern  is  engaged  in  exporting  articles  or  carrying  exports,  and 
that  the  tax  may  thus  incidentally  increase  the  price  of  such  articles,  but 
whether  it  is  laid  upon  an  exporting  business  as  such.  If  it  were  otherwise, 
and  if  the  carrying  of  an  article  exempted  from  taxation  under  this  clause, 
also  exempted  the  business  of  the  carrier,  then  no  tax  could  be  imposed  by 
either  the  United  States  or  any  State  upon  any  of  the  principal  railroad  com- 
panies in  the  country,  as  all  the  main  lines  are  daily  engaged  in  carrying 
commerce  which  has  been  consigned  to  foreign  ports  to  the  seaboard  for  ship- 
ment; and  while  being  so  carried  such  commerce,  if  being  technically  exported, 
is  certainly  "  in  the  way  of  exportation  "  as  suggested  in  Turpin  v.  Burgess, 
117  U.  S.  508. 

The  question  here  under  consideration  should  be  carefully  distinguished  from 
that  involved  in  the  numerous  cases  in  which  taxes  either  direct  or  indirect, 
imposed  by  States,  have  been  held  unconstitutional  under  that  clause  which 
vests  power  in  Congress  to  regulate  commerce  with  foreign  nations  among  the 
several  States  and  with  the  Indian  tribes.  According  to  numerous  decisionu 
of  the  Supreme  Court  of  the  United  States,  this  clause  prohibits  the  State  from 
interfering  by  any  character  of  legislation  with  interstate  commerce;  and 
lience,  any  taxation  which  places  a  burden  upon  that  commerce,  and  inter- 
feres therewith,  is  unlawful,  regardless  of  whether  it  be  a  tax  laid  upon  the 
transportation  of  the  subjects  of  commerce,  or  upon  the  receipts  derived  from 
that  transportation,  or  upon  the  occupation  or  business  of  carrying  it  on. 
This  is  not  true,  however,  as  to  the  clause  here  in  question.  For  a  tax  to  be 
violative  of  this  clause  it  must  be  imposed  upon  the  exported  article,  and  the 
courts  have  never  gone  further  than  to  hold  that  it  is  so  imposed,  within  the 
spirit  of  this  clause,  when  the  tax  may  be  directly  traceable  to  such  article 
as  an  export. 

There  appears  another  reason  why  these  companies  cannot  escape  this  tax. 
In  Aguirre  v.  Maxwell,  3  Blarcg.  140,  it  was  insisted  that  a  tonnage  tax 
upon  a  foreign  vessel  was  contrary  to  this  provision  of  the  Constitution;  but 
the  court  held: 

"  It  is  within  the  discretion  of  Congress  to  totally  inhibit  the  import  or 
export  trade  in  foreign  vessels  to  or  from  our  ports,  or  to  grant  them  the 
privilege  of  bringing  in  or  carrying  out  cargoes  on  such  conditions  and  under 
such  regulations  as  may  be  regarded  most  beneficial  to  the  United  States." 

And  the  tonnage  tax  remains  to  this  day  on  our  statute  books,  the  last 
enactment  being  section  36  of  the  act  of  which  the  law  under  consideration  is 
section  38.  If  the  tax  upon  the  tonnage,  that  is,  the  carrying  capacity  of 
the  vessel,  is  not  a  tax  upon  the  merchandise  it  carries,  then  it  cannot  be 
perceived  how  a  tax  "  with  respect  to  the  carrying  on  or  doing  business  "  by 
the  owners  of  the  vessels  can  be  a  tax  on  such  merchandise.  Certainly  the 
latter  tax  is  further  removed  from  the  merchandise  than  the  former.  And  if 
the  owner  of  the  foreign  vessel  can  be  made  to  pay  a  tax  on  his  business, 
when  such  business  consists  entirely  in  the  transportation  of  passengers  and 
merchandise  in  foreign  vessels. 

I  am  of  the  opinion,  therefore,  that  the  steamship  companies  in  question  are 
corporations  subject  to  the  excise  tax  created  by  section  38  of  the  Act  of 
August  5,  1909." 

Fed.  Corp.  Tax  —  6 


82  Federal  Corporation  Tax  Law. 

Sec.  41.  Meaning  of  Phrase,  "Engaged  In  Business  In  the 
United  States."  —  The  phrase  "engaged  in  business  in  the 
United  States  "  is  one  which  apjjears  in  substantially  the  same 
form  in  most  of  those  statutes  of  the  several  States  imposing  a 
franchise  or  other  permit  tax  upon  all  corporations  engaged  in 
business  in  a  particular  State,  but  organized  under  the  laws  of 
some  other  State  than  that  wherein  the  particular  business  so 
taxed  is  carried  on.  Such  State  legislation  has  called  for  a  great 
deal  of  interpretation  from  the  several  State  courts,  and  has  at 
the  present  time  a  very  well  understood  meaning.  This  meaning 
can  best  be  arrived  at  by  deducing  from  the  various  decisions 
bearing  on  this  subject  such  rules  as  commend  themselves  to  one's 
judgment  as  being  based  upon  sound  legal  reasoning  and  generally 
supported. 

Sec.  42.  Rules  for  Determining  Whether  a  Foreign  Cor- 
poration Is  Engaged  In  Business  In  the  United  States.  —  1,  In 
order  to  "  engage  in  business  within  the  United  States  "  it  is  not 
indispensable  that  a  foreign  corporation  should  do  the  greater 
part  of  its  business  therein.  If  it  does  any  part  of  its  ordinary 
business  therein,  it  may  be  said  to  engage  in  business  in  the 
United  States  within  the  meaning  of  the  Federal  Corporation 
Tax  Law. 

2.  Generally  speaking,  the  making  of  a  single  isolated  contract 
within  the  United  States  is  not  a  sufficient  foundation  upon  which 
to  predicate  a  statement  that  a  foreign  corporation  is  engaged  in 
business  within  the  United  States.  There  nnist  be  more  or  less 
continuity  in  the  matter.  (Cooper  Mfg.  Co.  v.  Ferguson,  113  U. 
S.  727,  5  Sup.  Ct.  Rep.  739,  28  L.  E.  1137.)  Foreign  steamship 
companies,  having  no  office  in  the  United  States,  whose  vessels  only 
toucli  iit  }>orts  in  the  United  States,  are  not  to  be  regarded  as  doing 
business  in  this  country  within  the  meaning  of  the  statute.  (T. 
R.  .March  20,  1010,  No.  inor,,  scv  Appendix  K.) 

.').  The  iti'^titiitidii  jind  iirosccution  of  actions  in  the  courts  of 
the  United  States  doen  not  of  itself  constitute  engaging  in  biisincRs 
in  tlin  United  States. 

4.  Foreign  eor])orations  may  take  mortgages  by  way  of  invest- 
ment, f)r  IIS  seenrity  for  debts,  or  inny  take  real  estate  as  security 


Scope  and  Intent  of  the  Act; 


83 


for  debts  without  thereby  becoming  engaged  in  business  within  tlie 
United  States  within  the  meaning  of  the  Federal  Corporation  Tax 
Law,  provided  the  doing  of  such  acts  is  not  within  the  express 
purpose  for  which  such  corporations  were  created ;  as  for  example, 
where  they  are  engaged  in  the  mortgage,  loan  or  real  estate 
business. 

5.  Where  foreign  corporations  consign  merchandise  to  persons 
in  the  United  States  for  purposes  of  sale,  and  sales  are  made 
thereof  by  the  vendor  in  his  own  name  and  the  proceeds  collected 
by  him,  such  foreign  corporations  cannot,  by  reason  thereof,  be 
treated,  as  having  engaged  in  business  in  the  United  States  within 
the  meaning  of  the  Federal  Corporation  Tax  Law. 

6.  A  foreign  corporation  may  transact  business  within  the 
United  States  through  the  medium  of  a  domestic  operating  com- 
pany, incorporated  here  for  that  purpose,  without  subjecting  itself 
to  the  payment  of  the  federal  corporation  tax,  as  being  engaged  in 
business  within  the  United  States.  (People  v.  Am.  Bell  Tel.  Co. 
117  N.  Y.  241,  22  N.  E.  1057;  People  v.  Kelsey,  101  App.  Div' 
205,  91  ]Sr.  Y.  Supp.  709. 


84  Federal  Corporation  Tax  Law. 


CHAPTER  V. 

TAX  RETURNS. 

Sec.  43.  Tax  Returns  —  General  Provisions  In  Relation 
Thereto.  —  Section  3  of  the  Federal  Corporation  Tax  Law  (lines 
9  to  95)  provides  that  on  or  before  the  first  day  of  March  of  each 
year  all  corporations,  joint  stock  companies  or  associations  and 
insurance  companies  subject  to  the  operation  of  the  Federal  Cor- 
poration Tax  Law,  shall  make  a  true  and  correct  return  in  such 
form  as  the  commissioner  of  internal  revenue,  with  the  approval 
of  the  Secretary  of  the  Treasury,  shall  prescribe. 

In  this  connection  attention  is  called  to  certain  rules  and  regula- 
tions issued  by  the  commissioner  of  internal  revenue,  with  the 
approval  of  the  Secretary  of  the  Treasury.  The  ones  to  which 
special  attention  is  directed  are  the  following  (T.  D.  August  21, 
1909,  No.  1534,  see  Appendix  B.)  : 

Attention  is  special!}'  called  to  section  38  of  the  Act  of  August  5,  1909, 
imposing  on  certain  corporations,  joint  stock  companies,  associations  and  in- 
surance companies  a  special  excise  tax  to  be  paid  annually. 

In  view  of  the  large  number  of  corporations,  companies  and  associations 
subject  to  this  tax,  collectors  of  internal  revenue  will,  on  receipt  of  this  cir- 
oular,  at  once  proceed  to  thoroughly  canvass  their  districts,  and  as  soon  as 
possible  furnish  this  ofTifTice  with  a  list  of  all  such  corporations,  companies  and 
associations  organized  in  their  districts,  setting  forth  the  amount  of  capital 
stock  and  principal  place  of  business  of  each.  They  will  also  furnish  a  .sepa- 
rate list  of  all  corporations,  companies  and  associations  organizezd  elsewhere 
(inchiding  such  as  are  organized  under  the  laws  of  a  foreign  coimtry)  having 
their  principal  place  of  business  in  the  district  where  such  list  is  prepared. 
Duplicates  of  such  lists  will  be  made  by  each  collector,  one  copy  thereof  to 
be  retained  in  his  nftlce,  and  the  other,  when  completed,  forwarded  to  th<* 
Commissioner  of  Internal  Revenue.  Blanks  to  be  used  in  such  cases  will  bo 
furnished  collectors;  and,  for  statistical  purposes  and  convenient  reference, 
all  such  corporations,  enmjianies  and  assoei.'\1ions  will  be  classified  ati<l  listed 
according  to  the  nature  of  the  business  carried  on  as  follows: 

('lass  A  —  I'Mnancial  and  commercial. —  Including  banks,  banking  associa- 
tions, trust  companies,  guaranty  and  surety  companies,  title  insurance  com- 


Tax  Retukns.  85 

panics,  building  associations  (if  for  profit)  and  insurance  companies,  not 
specifically  exempt. 

Class  B  —  Public  service.  —  Such  as  railroads,  steamboat,  ferryboat  and 
stage  line  companies,  pipe  lines,  gas  and  electric  light  companies,  express, 
transportation  and  storage  companies,  telegraph  and  telephone  companies. 

Class  C  —  Industrial  and  manufacturing.  —  Such  as  mining,  lumber  and 
coke  companies,  rolling  mills,  foundry  and  machine  shops,  sawmills,  fiour, 
woolen,  cotton  and  other  mills;  manufacturers  of  cars,  automobiles,  elevators, 
agricultural  impliments,  and  all  articles  manufactured  wholly  or  in  part  from 
metal,  wood,  or  other  material,  manufacturers  or  refiners  of  sugar,  molasses, 
sirups,  or  other  products,  ice  and  refrigerating  companies,  slaughter  house, 
tannery,  packing  or  canning  companies,  etc. 

Class  D  —  Mercantile.  —  Including  all  dealers  (not  otherwise  classed  as 
producers  or  manufacturers)  in  coal,  lumber,  grain,  produce,  and  all  goods, 
wares  and  merchandise. 

Class  E  —  Miscellaneous. —  Such  as  architects,  contractors,  hotel,  theatre  or 
other  companies,  or  associations  not  otherwise  classed. 

When  classified  as  above  indicated  the  names  of  the  various  corporations, 
companies  and  associations  will  be  listed  alphabetically,  and  will  be  num- 
bered consecutively  (commencing  with  No.  I  in  each  class)  and  in  forwarding 
returns  or  papers  subsequently  rendered  or  submitted  by  such  corporations 
or  companies  collectors  will  see  that  the  same  have  placed  thereon  the  desig- 
nating class  letter  and  number  corresponding  with  those  noted  on  the  lists 
herein  required  to  be  furnished. 

Every  corporation,  etc.,  not  specifically  enumerated,  as  exempt, 
shall  make  the  return  required  by  law,  although  its  net  income 
during  the  year  may  not  have  exceeded  $5,000.  (T.  R.  March  29, 
1910,  No.  1606,  see  Appendix  K.) 

Where  a  consolidation  of  two  or  more  corporations  has  been 
effected  during  the  year,  and  each  or  any  such  corporation  sub- 
sequent to  such  consolidation  collects  prior  existing  debts,  each 
such  corporation  should  make  a  separate  return  and  include 
thereon  all  such  collected  debts,  as  also  all  income  received  during 
the  year  prior  to  the  date  of  consolidation,  (T,  R,  March  29, 
1910,  No.  1606,  see  Appendix  K.)  As  the  law  specifically  pro- 
vides that  the  tax  imposed  shall  be  computed  on  the  net  income 
during  each  calendar  year,  returns  of  income  based  on  any  period 
other  than  the  calendar  year  cannot  be  accepted.  (T,  R.  March 
29,  1910,  No.  1606,  see  Appendix  K.) 

No  particular  system  of  bookkeeping  or  accounting  'will  be 
required  by  the  department.  However,  the  business  transacted  by 
corporations,  etc.,  must  be  so  recorded  that  each  and  every  item 
therein  set  forth  may  be  readily  verified  by  an  examination  of  the 


86  Federal  Corpoeation  Tax  Law. 

books  and  accounts  where  sucli  examination  is  deemed  necessary. 
(T.  E.  March  29,  1910,  No.  1606,  see  Appendix  K.) 

Sec.  44.  Inventories.  —  The  commissioner  of  internal  revenue 
has  recognized  that  in  the  case  of  many  classes  of  corporations 
inventories  are  absolutely  essential  in  order  to  fill  out  properly  the 
return  prescribed  by  the  Treasury  Department-  In  this  connec- 
tion, attention  is  called  to  the  following  regulations  promulgated 
by  the  commissioner  of  internal  revenue  (T.  R.  December  3,  1909, 
No.  31,  see  Appendix  C.)  : 

It  will  be  noted  that  an  inventory  or  its  equivalent  of  materials,  supplies 
and  merchandise  on  hand  for  use  or  sale  at  the  close  of  each  calendar  year  is 
essential  in  the  case  of  certain  corporations  in  order  to  determine  the  gross 
income,  and  in  case  of  other  corporations  to  determine  their  expenses  of  opera- 
tion. Where  such  inventory  or  its  equivalent  was  not  taken  at  the  close  of 
the  year  1908,  a  supplemental  statement  showing  such  inventory  approxi- 
mately must  be  submitted  with  the  return  on  the  regular  form.  Such  supple- 
mental statement  shall  be  verified  under  oath  by  the  treasurer  or  principal 
financial  oilieer  in  submitting  the  same. 

Where  any  item  under  any  of  the  deductions  is  of  an  unusual  nature  a 
special  explanatory  note  referring  to  such  item  shall  be  made  and  attached 
to  the  form  at  the  appropriate  place  and  made  a  part  thereof  by  proper 
reference. 

Paragraph  3  of  said  section  38  also  provides: 
"  and  said  tax  shall  be  computed  upon  the  remainder  of  said  net  income  of 
such  corporation,  joint  stock  company  or  association,  or  insurance  company, 
for  the  year  ending  December  thirty-first,  nineteen  hundred  and  nine,  and  for 
each  calendar  year  thereafter;  and  on  or  before  the  first  day  of  March,  nine- 
teen hundred  and  ten,  and  the  first  day  of  March  in  each  year  thereafter,  a 
true  and  accurate  return  under  oath  or  aflirniation  of  its  ])resident,  vice- 
president  or  other  principal  officer,  and  its  treasurer  or  assistant  treasurer 
shall  \h'  made  by  each  of  the  corporations,  joint  stock  comjjanies  or  associa- 
tions, and  insurance  companies  subject  to  the  tax  imposed  by  this  section,  to 
the  collector  of  internal  revenue  for  the  district  in  which  such  corporation, 
joint  stock  company  or  association,  or  insurance  company,  organized  under  the 
laws  of  a  foreign  country  in  the  place  wliere  its  |)rincipal  business  is  carried 
on  within  the  United  States,  in  such  form  as  the  Commissioner  of  Internal 
Kevenue,  with  the  approval  of  the  Secretary  of  Treasury,  shall  prescribe." 

Kiich  return  so  made  is  required  to  set  forth: 

(a)  The  total  amount  of  the  paid-up  capital  stock  of  such  corporations, 
joint  stock  companies  or  associations,  or  insurance  companies  outstanding  at 
the  close  of  the  y<'ar  : 

(b)  The  total  amount  of  bonded  and  oflu-r  indebtedness  of  such  corpora- 
tion, joint  stock  company  or  association,  or  insurance  company,  at  the  close 
of  the  year; 


Tax  Eetuens.  87 

(L)  The  gross  amount  of  the  income  of  such  corporation,  joint  stock  com- 
pany or  association  or  insurance  company,  received  during  the  year  from  ali 
sources,  and  if  organizeci  under  the  laws  of  a  foreign  country,  the  gross  amount 
of  its  income  received  vvithin  the  year  from  business  transacted  and  capital 
iiivested  within  tlie  United  States  and  any  of  its  territories,  Alaska  and  the 
District  of  Columbia. 

Such  returns  are  also  required  to  set  forth  the  items  claimed  as  deductions 
(article  4),  also  the  net  income  after  such  deductions  have  been  made.  (T. 
R.  Dec.  3,  1909,  No.  .31.) 

Calendar  year. —  As  the  law  specifically  provides  that  the  tax  imposed  shall 
be  computed  on  the  net  income  during  each  "  calendar  year,"  returns  of  in- 
come based  on  any  period  other  than  the  calendar  year  cannot  be  accepted. 

Corporations  organized  during  the  year  or  going  into  liquidation  during 
the  year  should  nevertheless  render  a  sworn  return  on  the  prescribed  form. 
(T.  R.  Dec.  3,  1909,  No.  31.) 

The  commissioner  of  internal  revenue  in  his  bulletin,  dated 
January  4,  1910  (T,  D.  1578,  see  Appendix  D.),  made  the  fol- 
lowing ruling  relative  to  the  period  to  be  covered  by  the  tax 
returns : 

In  order  that  the  position  of  this  office  may  be  known  to  all  interested  m 
this  subject,  attention  is  invited  to  the  language  of  the  act  bearing  on  this 
point.     Subdivision  3  reads  in  part  as  follows: 

" .  .  .  and  said  tax  shall  be  computed  upon  the  remainder  of  said  net 
income  of  such  corporation,  joint  stock  company  or  association,  or  insurance 
company,  for  the  year  ending  December  thirty-first,  nineteen  hundred  and  nine, 
and  for  each  calendar  year  thereafter." 

From  this  it  will  be  seen  that  the  law  fixes  the  calendar  year  as  the  period 
to  be  covered  by  these  returns,  and  no  one  is  vested  with  discretionary  power 
to  change  it. 

In  the  ruling  made  by  the  commissioner  of  internal  revenue 
under  date  of  January  4,  1910  (No.  1578,  see  Appendix  D.),  the 
following  rule  was  laid  down  relative  to  the  manner  of  arriving 
at  an  inventory,  to  wit : 

Many  inquiries  have  been  submitted  to  me  as  to  the  manner  of  arriving  at 
an  inventory  January  1,  1909,  where  none  was  taken  on  that  date,  and  where 
the  fiscal  year  of  the  corporation  ends  with  a  date  other  than  December  31. 

In  article  5  of  Regulations  No.  31,  it  is  stated  that  an  inventory  or  its 
equivalent  of  materials,  supplies  and  merchandise  on  hand  for  use  or  sale 
at  the  close  of  each  calendar  year  is  essential  in  the  case  of  certain  corpora- 
tions in  order  to  determine  the  gross  income,  and  in  case  of  other  corporations 
to  determine  their  expenses  of  operation.  Where  such  inventory  or  its  equiva- 
lent was  taken  at  the  close  of  the  year  1908,  a  supplemental  statement,  show- 
ing such  inventory  approximately,  must  be  suhniitt<'(l  witli  return  on  the 
regular  form.     Such  supplemental  statement  shall  be  verified  under  oath,  etc. 


88  Federal  Corporation  Tax  Law. 

Under  the  statute  no  return  for  a  period  other  than  the  calendar  year  can 
be  accepted.  The  primary  object  to  be  kept  in  view  is  the  preparation  of  a 
statement  or  return  which  shall  correctly  set  forth  the  net  income  taxable 
under  the  law.  If  this  can  be  accomplished  without  the  necessity  of  an 
inventory,  either  at  the  beginning  or  the  close  of  the  calendar  year,  actual 
inventories  are  not  necessary.  If,  however,  a  statement,  such  as  may  be  veri- 
fied by  oath  of  the  officers  of  the  corporation,  showing  the  net  taxable  income, 
cannot  be  made  without  an  inventory,  then  the  same  is  necessarily  required. 

It  is  believed  that  corporations  whose  business  is  of  sufficient  volume  to 
produce  a  taxable  income  under  this  law  would  ordinarily  keep  such  books  as 
would  enable  them  to  arrive  at  a  book  inventory,  or  what  might  be  termed  the 
"  equivalent  "  or  an  inventory  for  the  period  between  the  1st  of  January  and 
the  end  of  their  fiscal  years.  While  the  office  is  unable  to  set  forth  any  rule 
in  this  connection  for  arriving  at  inventories  or  their  equivalents,  the  corpora- 
tions will  readily  see  the  necessity  of  resorting  to  the  best  means  at  their 
hands  to  show  in  their  sworn  returns  their  net  taxable  income. 

Under  date  of  January  24,  1910  (T.  D.  1588,  see  Appendix 
F.),  tlie  commissioner  of  internal  revenue  issued  a  bulletin  read- 
ing as  follows,  to  wit : 

Sir.  —  Your  letter  dated  the  I9th  instant  has  been  received,  in  which  you 
ask  certain  questions  relative  to  making  returns  under  the  provisions  of  sec- 
tion 38,  Act  of  August  5,  1909.     You  state: 

"  In  the  first  place,  relative  to  a  manufacturing  company,  in  your  para- 
graph 3  on  page  8  of  the  laws  and  regulations,  you  say:  '  Cost  of  goods  manu- 
factured shall  be  ascertained  by  the  addition  of  a  charge  to  the  account  of  the 
cost  of  goods  as  manufactured  during  the  year  of  the  sum  in  the  inventory  at 
the  beginning  of  the  year.'  Does  this  mean  that  the  cost  must  be  ascertained 
fiom  the  price  of  the  raw  materials  and  the  amount  of  labor  expended,  irre- 
spective of  overhead  charges,  or  should  overhead  cliarges  be  included  in  the 
cost,  and  should  the  addition  then  be  made  to  the  total  net  worth  of  the  con- 
cern as  shown  by  the  inventory  of  the  previous  year  and  that  subtracted  from 
the  net  worth  of  the  concern  at  tlie  end  of  the  year;  or  in  what  way  is  this 
section  construed?  " 

In  reply  you  are  advised  that  for  the  purpose  of  making  a  correct  return 
in  accordance  with  the  provisions  of  section  38  of  the  Act  of  August  5.  1909. 
it  is  necessary  to  follow  closely  the  well  established  commercial  rules  for 
keeping  the  accounts  of  the  business  of  manufneturers.  In  keeping  such  ac- 
counts in  a  sci<>ntific  manner  it  is  well  understood  by  all  bookkeepers  that  if 
an  inventory  is  taken  on  December  31,  the  end  of  the  calendar  year,  the 
credits  entered  as  balances  in  the  several  ledger  accounts  show  the  assets 
that  such  corporation  has  on  hand,  and  hence  the  instructions  in  "Note  A" 
at  the  bottom  of  the  printed  Form  037  state  that  "the  cost  of  the  goods 
mannf;iefiin'(l  sIkiII  he  nHccrtMiiicil  by  nn  addition  of  a  charge  (debit)  to  the 
account  of  tlie  cost  of  tlie  poods  as  manufacttired  during  tlie  year  of  the  sum 
of  the  inventorv  at  the  beginning  of  the  year."  All  cn-dit  balances  above 
referred  to  are  transferred  to  the  debit  aide  of  such  accounts  when  the  sam-* 
are  reopened  on  eoiiiinencing  business  in  the  (irst  of  the  year,  and  the  "  addi- 


Tax  Returns.  89 

tion  of  a  charge,"  as  noted  above,  is  thus  made  to  the  several  accounts  that 
are  debited  with  the  cost  of  goods  numufactured  during  the  year.  The  credit 
to  the  account  is  tlien  made  at  the  close  of  the  year  when  the  inventory  is 
taken. 

Capital  stock  is  held  to  include  preferred  and  common  stock. 
(T.  R.  March  29,  1910,  No.  IGOG,  see  Appendix  K.) 


Sec.  45.  Content  of  the  Return.  —  The  return  shall  set  forth : 

(First)  The  total  amount  of  the  paid-up  capital  stock  of  such  corporation, 
joint  stock  company  or  association,  or  insurance  company,  outstanding  at  the 
close  of  the  year ;  ( second )  the  total  amount  of  the  bonded  and  other  indebted- 
ness of  such  corporation,  joint  stock  company,  or  association,  or  insurance 
company  at  the  close  of  the  year;  (third)  the  gross  amount  of  the  income  of 
such  corporation,  joint  stock  company  or  association  or  insurance  company, 
received  during  such  year  from  all  sources,  and  if  organized  under  the  laws 
of  a  foreign  country,  the  gross  amount  of  its  income  received  within  the  year 
from  business  transacted  and  capital  invested  within  the  United  States  and 
any  of  its  territories,  Alaska  and  the  District  of  Columbia;  also,  the  amount 
received  by  such  corporation,  joint  stock  company  or  insurance  company  within 
the  year  by  way  of  dividends  upon  stock  of  other  corporations,  joint  stock 
companies  or  associations,  or  insurance  companies,  subject  to  the  tax  imposed 
by  this  section;  (fourth)  the  total  amount  of  all  the  ordinary  and  necessary 
expenses  actually  paid  out  of  earnings  in  the  maintenance  and  operation  of 
the  business  and  property  of  such  corporation,  joint  stock  company  or  asso- 
ciation, or  insurance  company  within  the  year,  stating  separately  all  charge.^ 
such  as  rentals  or  franchise  payments  required  to  be  made  as  a  condition  to 
and  continued  use  or  possession  of  property,  and  if  organized  under  the  laws 
of  a  foreign  country,  the  amount  so  paid  in  the  maintenance  and  operation  of 
its  business  within  the  United  States  and  its  territories,  Alaska,  and  the  Dis- 
trict of  Columbia;  (fifth)  the  total  amount  of  all  losses  actually  sustained 
during  the  year  and  not  compensated  by  insurance  or  otherwise,  stating 
separately  any  amounts  allowed  for  depreciation  of  property,  and  in  the  case 
of  insurance  companies  the  sums  other  than  dividends  paid  within  the  year 
on  policy  and  annuity  contracts  and  the  net  addition,  if  any.  required  by  law 
to  be  made  within  the  year  to  reserve  funds;  and  in  the  case  of  corporation, 
joint  stock  company  or  association  or  insurance  company  organized  under  t1i<' 
laws  of  a  foreign  country,  all  losses  actually  sustained  by  it  during  the  year 
in  business  conducted  by  it  within  the  United  States  or  its  territories.  Alaska, 
and  the  District  of  Columbia,  not  compensated  by  insurance  or  otherwise,  stat- 
ing separately  any  amounts  allowed  for  depreciation  of  property,  and  in  the 
case  of  insurance  companies  the  sums  other  than  dividends  paid  within  the 
year  on  policy  and  annuity  contracts  and  the  net  addition,  if  any,  reqiiired 
by  law  to  be  made  within  the  year  to  reserve  fund;  (sixth)  the  amount  of 
interest  actually  paid  within  the  year  on  its  bonded  or  other  indebtedness  to 
an  amount  of  such  bonded  and  other  indebtedness  not  exceeding  the  naid-up 
capital  stock  of  such   corporation,   joint  stock  company    or   association,   or 


DO  i'jSDEJKAL    CORPOEATIOK    TaX    LaW. 

insurance  company,  outstanding  at  the  close  of  the  year,  and  in  the  case  of  a 
liank,  banking  association  or  trust  company,  stating  separately  all  interest 
paid  by  it  within  the  year  on  deposits;  or  in  case  of  a  corporation,  joint 
stock  company  or  association  or  insurance  company  organized  under  the  laws 
of  a  foreign  country,  interest  so  paid  on  its  bonded  and  other  indebtedness  not 
exceeding  the  proportion  of  its  paid  up  capital  stock  outstanding  at  the  close 
of  the  year,  which  the  gross  amount  of  its  income  for  the  year  from  business 
tiausacted  and  capital  invested  within  the  United  States  and  any  of  its 
territories,  Alaska,  and  the  District  of  Columbia,  bears  to  the  gross  amount 
of  its  income  derived  from  all  sources  within  and  without  the  United  States; 
(seventh)  the  amount  paid  by  it  within  the  year  for  taxes  imposed  under  the 
authority  of  the  United  States  or  any  State  or  Territory  of  the  United  States, 
or  anj'  State  or  Territory  thereof,  and  separately  the  amount  so  paid  by  it 
for  taxes  imposed  by  the  government  of  any  foreign  country  as  a  condition 
to  carrying  on  business  therein;  (eighth)  the  net  income  of  such  corporation, 
joint  stock  company  or  association,  or  insurance  company,  after  making  the 
deductions  in  this  section  authorized.  All  such  returns  shall  as  received  be 
transmitted  forthwith  by  the  collector  to  the  Commissioner  of  Internal  Reve- 
nue.      (See  Appendix  A,  par.  3,  lines  24  to  95.) 

In  his  bulletin  issued  January  24,  1910  (T.  D.  1588,  see 
Appendix  F.),  the  commissioner  of  internal  revenue  made  the 
following  rules: 

1.  That  the  return  shall  show  the  gross  income  (profit)  received  during  the 
year,  which  is  reported  in  item  3  on  form  637. 

2.  All  the  necessary  expenses  in  the  maintenance  and  operation  of  the 
business  and  properties,  which  include  labor,  fuel,  rentals,  insurance,  etc., 
shown  in  item  4. 

3.  Tosses  sustained  during  the  year  and  not  compensated  by  insurance,  or 
otherwise,  including  a  reasonable  allowance  for  depreciation,  shown  in  item  5 
a  and  b. 

4.  Interest  on  bonded  or  other  indebtedness  to  an  amount  not  exceeding  the 
paid-up  capital  stock,  shown  in  item  6. 

5.  All  sums  imposed  for  taxes  during  the  year,  shown  in  item  7. 

6.  All  amounts  received  by  it  as  dividends  upon  stock  of  other  corporations, 
etc.,  subject  to  the  tax  imposed,  as  shown  in  item  8. 

To  make  a  correct  return  it  is  necessary  for  the  accountant  to  know: 

1.  The  exact  resources  and  liabilities  of  the  corporation,  both  on  January  1 
and  Decenil)or  31  of  the  year  cov<'rod  by  the  same. 

2.  A  full  statement  of  the  business  transacted  during  the  year. 

Full  amount  of  stock,  as  represented  by  the  y)ar  vnhio  of  the  shares  issjied, 
to  he  regardf'd  as  the  paid-np  capital  stork,  except  wlien  such  stock  is  assess 
nhlc   on    accf>unt  of   dcfcrrc<I    pnynu-nts,    in    which    case    the    amount   actually 
paid   on    HMch   shares   will   constitntc   the   actual   paid-up  capital   stock  of  the 
cornomtion.      (T.   K.  No.    ICOC.    ^t;u■(•ll   20.   IPIO.  see  Appendix   K.) 

Where  an  inventory  fir  its  <'(Hiiv;ilciit  was  not  taken  at  the  close  of  the  year 
MIOH.  a  supplemental  rtiiteiiient  showinLj  Huch  inventory  approxiinntelv  ivwnt 
be  submitted  with  the  return  on  the  regular  form.     Such  8up])lementnl  state- 


Tax  Returns.  91 

ment  shall  be  verified  under  oath  by  the  treasurer  or  principal  financial  offi- 
cer submitting  the  same.  (T.  D.  No.  1578,  see  Appendix  D. ;  T.  R.  March 
29th,  1910,  No.  1606,  see  Appendix  K.) 

Bookkeeping.  —  No  particular  system  of  bookkeeping  or  accounting  will  be 
required  by  the  department.  However,  the  business  transacted  by  corpora- 
tions, joint  stock  companies,  associations  or  insurance  companies  must  be  so 
recorded  that  each  and  every  item  therein  set  forth  may  be  readily  verified 
by  an  examination  of  the  books  and  accounts,  where  such  examination  is 
deemed  necessary.      (T.  D.  No.  1571,  Dec.  3,  1909,  see  Appendix  C.) 


Sec.  46.  The  Return  —  By  Whom  Made.  —  The  return  must 
be  made  in  each  case  by  the  "  president,  vice-president  or  other 
principal  officer,  and  the  treasurer  or  assistant  treasurer  of  the 
corporation,  joint  stock  company  or  association  making  the  same." 
The  phrase  "  other  principal  officer,"  as  here  used,  undoubtedly 
means  the  executive  head  of  the  corporation,  joint  stock  company 
or  association  making  the  return,  whether  the  same  be  known  as 
a  president  or  vice-president,  or  by  any  other  name.  Just  so  long 
as  the  officer  making  the  return  is  the  executive  head  of  the 
organization,  that  is  sufficient. 

It  should  be  noted  that  in  every  instance  the  return  must  be 
made  by  at  least  two  officers,  one  of  whom  is  the  executive  head 
of  the  company  making  the  return,  while  the  other  has  charge  of 
its  finances,  and  is  therefore  supposed  to  be  conversant  with  its 
financial  conditions. 

The  following  rules,  relative  to  the  return,  were  made  by  the 
commissioner  of  internal  revenue,  in  his  bulletin  issued  under 
date  of  March  29  (T.  R.  No.  1606,  see  Appendix  K.),  to  wit: 

6.  Where  a  corporation  has  gone  into  bankruptcy,  returns  in  such  case  to 
be  made  by  trustee  in  bankruptcy. 

10.  Foreign  companies  having  several  branch  offices  in  the  United  States 
should  also  designate  the  proper  officers  to  make  the  required  return. 

33.  Returns  should  be  signed  and  verified  by  two  of  the  officers  designated 
in  the  law.  Signing  of  one  person  holding  two  such  offices  not  permitted. 
Agents  for  foreign  steamship  companies  may  sign  the  required  returns,  if  so 
authorized  by  their  companies. 

34.  Returns  not  required  to  have  corporate  seal  affixed. 

35.  Returns  filed  with  deputy  collector  regarded  as  having  been  filed  with 
collector. 

Sec.  47.  The  Return  —  Where  to  Be  Made.  —  Tn  the  prac- 
tical operation  of  the  act  some  confusion  has  arisen  in  detcrmin- 


92  Federal  Corporation  Tax  Law. 

ing  in  what  revenue  district  the  returns  for  the  purpose  of  com- 
plying with  the  terms  of  the  Federal  Corporation  Tax  Act  should 
be  made.  The  return  must  be  made  to  the  collector  or  deputy 
revenue  collector  within  the  district  wherein  is  located  the  princi- 
pal place  of  the  business  of  the  corporation,  joint  stock  company  or 
association  making  the  return.     (Act,  section  3,  lines  11-19.) 

Under  the  ruling  of  the  commissioner  of  internal  revenue,  the 
company's  principal  place  of  business  is  held  to  mean  the  principal 
office  where  the  company  keeps  its  books  from  which  the  required 
return  is  to  be  prepared,  and  in  tlie  place  where  the  operating 
plant  is  located.  (T.  R.  March  29,  1910,  No.  1G06,  see  Appendix 
K) 

Sec.  48.  Verification  of  Return.  —  The  return  must  be  ac- 
companied in  every  instance  by  either  the  oath  or  the  affirmation 
of  both  the  executive  head  of  the  company  making  the  return  and 
that  of  its  treasurer  or  assistant  treasurer.  The  form  of  the 
verification,  as  prescribed  by  the  commissioner  of  internal  revenue, 
with  the  approval  of  the  Secretary  of  the  Treasury,  is  as  follows : 


STATE  OF 

County  of 


\ 


,  President    (vice-president)    (here  name  some  execu- 
tive officer  having  executive  powers)  and ,  Treasurer   (or 

assistant  treasurer)  of  the   corporation   (company  or 

association)  whose  return  of  annual  net  income  is  set  forth  above,  hoinf;  sepa- 
rately duly  sworn  (or,  of  the  olficers  arc  to  aflirm,  tl>e  verification  should  read 
as  follows)  (doth  each  severally  alTirm)  and  each  for  himself  and  each  de- 
poses and  says,  that  the  foregoing  report  of  the  several  items  therein  set  forth, 
are,  to  hi^  best  knowledge  and  l)eli('f,  and  from  such  information  as  he  has 
been  able  to  obtain,  true  and  correct  in  eacli  and  every  particular;  that  the 
amount  of  gross  income  therein  set  forth  is  the  full  amount  of  gross  income 
without  any  deductions  whatsoever  received  from  all  sources  by  fjie  said  ci>r- 
poration  during  the  year  jireceding  and  that  the  net  income  therein  set  forth 
is  tlie  full  amount  upon  which  the  tax  is  proper  to  be  assessed. 


Sworn  and 

this   .  .   (I 


subscribed  to  before  me  | 
ay  of   101    .    \ 


President. 
Treasurer. 


Notary  J'uhlie. 
(Notarial  Seal.) 


Tax  Returns.  i)'<i 

Sec.  49.  Tax  Returns  from  Insurance  Companies.  —  Under 
the  regulations  established  by  authority  of  the  Federal  Corpora- 
tion Tax  Law  by  the  commissioner  of  internal  revenue,  with  the 
approval  of  the  Secretary  of  the  Treasury,  all  insurance  com- 
panies must  make  a  return  in  substantially  the  following  form : 
(See  Appendix  U.) 

Form  No.  634. 

To  be  filled  in  by  Internal  Revenu-J 
To  be  filled  in  by  Collector.  Bureau. 

List  No Assessment  List 19 ...  . 

Class Page  Line   

District  of Date  Received   19. . . . 

UNITED  STATES  INTERNAL  REVENUE. 

Retubn  of  Annual  Net  Income. 

(Section  38,  Act  of  Congress,  approved  August  5,  1909.) 

Insurance  Companies. 

Return  of  Net  Income  received  during  the  year  ending  December  31,  19. ., 

by ,  a  corporation,  the  principal  place  of 

business  of  which  is  located  at  ,  in  the  State  of 

1.  Total  amount  of  paid-up  stock  outstanding  at  close  of  year.      $ 

2.  Total  amount  of  bonded  or  other  indebtedness  outstanding 

at  close  of  year 

3.  Gross  income 

(The  gross  income  shall  consist  of  the  total  of  the  gross 
revenue  derived  from  the  operation  and  management  of  its 
business  and  properties,  together  with  all  amounts  of 
income,  including  dividends  on  stock  of  organizations  to 
this  special  excise  tax  from  other  sources  as  shown  by  the 
entries  on  its  books  from  January  1  to  December  31  of 
the  year  for  which  return  is  made.) 

Deductions. 

4.  Total  amount  of  all  the  ordinary  and  necessary  expenses  of 

maintenance  and  operation  of  the  business  and  properties 

of  the  corporation   

(The  deductions  authorized  shall  include  all  expense  items 
under  the  various  heads  acknowledged  as  liabilities  by 
the  corporation  making  the  return  and  entered  on  its 
books  from  January  1  to  December  31.) 

5.  (c)   Total  amount  of  losses  sustained  January 

1  to  December  31 $ 

(6)   Total  amount  of  depreciation  January   1 

to  December  31 


94  Iederal  Corporation  Tax  Law. 

(c)  Total  amount  other   than   dividends  paid 

within  the  year  on  policy  and  an- 
nuity  contracts    $ 

(d)  Total  amount  of  net  addition  required  by 

law  to  be  made  within  tlie  year  to  re- 
serve fund 

Total $. 

(The  deductions  authorized  shall  include  all  expense  items 
under  the  various  heads  acknowledged  as  liabilities  by 
the  corporation  making  the  return  and  entered  on  its 
books  from  January  1  to  December  31.) 

6.  Total   amount    of   interest   January    1    to   December    31    on 

bonded  indebtedness  to  an  amount  not  to  exceed  amount 

of  paid-u})  capital  at  close  of  year 

(S€e  Note  to  No.  5.) 

7.  (a)    Total  taxes  paid  January   1   to  December 

31,  imposed  under  authority  of  the 
United  States  or  any  State  or  Territory 
thereof $ 

(  b )    Foreign  taxes  paid   

Total  (See  Note  to  No.  5) 

8.  Amount  received  by  way  of  dividends  upon  stock  of  other 

corporations,  joint  stock  companies,  associations  and  in- 
surance companies,  subject  to  this  tax 


•  ••«•• 


Total  Deductions  $ 

9.  Net  Income   $ 

10.  Specific  deductions  from  net  income  allowed  by  law $5,000  00 


11.  Amount  on  which  tax  at  one  per  centum  is  calculated  for 

assessment $ . 


(Verification,  as  provided  in  section  46.)        ^ 

(This  form,  properly  filled  out  and  executed,  must  be  in  the  hands  of  the 
collector  of  internal  rovemie  for  tlio  district  in  which  is  located  the  principal 
ofiice  of  the  corpor.ition  making  the  return  on  or  before  March  1.) 


Sec.  50.  Tax  Returns  From  Banks  and  Financial  Institu- 
tions.—  ruder  tlic  n'ijnilalioiis  cstiiblislicd  hy  niitliority  <>f  tlio 
Federal  ( 'orporsitidii  Tax  Law  Ity  tlic  ('(iiiniiissioiier  of  internal 
rnvornie,  willi  llie  approxal  <if  tlie  Secretary  (if  llie  Treasury,  all 
banks  and  financial  institutions  must  make  a  return  in  sub«tan- 
tially  tlio  following  form.     (See  Appendix  W.) 


Tax  Kkturns.  95 

FOBM  No.  635. 

To  be  filled  in  by  Internal  Revenue 
To  be  filled  in  by  Collector.  Bureau. 

List  No Assessment  List 19 ... . 

Class Page  Line 

District  of Date  Received   19 

UNITED  STATES  INTERNAL  REVENUE. 

Return  of  Annual  Net  Income. 

(Section  38,  Act  of  Congress,  approved  August  5,  1909.) 

Banks  and  Other  Financial  Institutions. 

Retubn  of  Net  Income  received  during  the  year  ending  December  31,  19.  ., 

by ,  a  corporation,  the  principal  place  of 

business  of  which  is  located  at in  the  State  of 

1.  Total  amount  of  paid-up  stock  outstanding  at  close  of  year.      $ 

2.  Total  amount  of  bonded  or  other  indebtedness  outstanding 

at  close  of  year 

3.  Gross  Income    

(Gross  income  shall  consist  of  the  total  amount  of  gross 
revenue  derived  from  the  operation  and  management  of  its 
business  and  properties,  together  with  all  amounts  of  in- 
come, including  dividends  on  stock  of  other  corporations, 
joint  stock  companies  and  associations  subject  to  this  tax 
derived  from  all  sources,  as  shown  by  the  entries  on  its 
books  from  January  1  to  December  31  of  the  year  for 
which  return  is  made.) 

Deductions. 

4L  Total  amount  of  all  the  ordinary  and  necessary  expenses  of 
maintenance  and  operation  of  the  business  and  properties 

of  the  corporation 

(The  deductions  authorized  shall  include  all  expense  items 
under  the  various  heads  acknowledged  as  liabilities  by 
the  corporation  making  the  return  and  entered  as  such  on 
its  books  from  January  1  to  December  31  of  the  year  for 
which  return  is  made.) 
fi.   (a)   Total  amount  of  losses  sustained  January 

1  to  December  31 $ 

(6)   Total  amount  of  depreciation  January  1  to 

December  31    

(See  Note  to  No.  4.) 

6.  (a)  Total  amount  of  interest  January  1  to 
December  31  on  bonded  or  other  in- 
debtedness to  an  amount  not  to  exceed 
amount  of  paid-up  capital  at  close  of 
year  ( See  Note  to  No.  4 ) 


•  •••••< 


96  Feder.\l  Corporation  Tax  Law. 

(6)   Total  amount  of  interest  paid  within  the 

year  on  deposits   

Total  {See  Note  to  No.  4) 

7.  (a)   Total  taxes  paid  January  1  to  December 

31,  imposed  under  authority  of  the 
United  States  or  any  State  or  Terri- 
tory thereof   $ 

( b )    Foreign  taxes  paid 

Totals   ( See  Note  to  No.  4) 

8.  Amount   received    by   way   of   dividends    upon 

stock  of  other  corporations,  joint  stock  com- 
panies, associations  and  insurance  companies 
subject  to  this  tax $ 

9.  Net  Income 

10-  Specific  deduction  from  net  income  allowed  by  law $5,000  GO 


'  •  • 


11.  Amount  on  which  tax  at  one  per  centum  is  to  be  calculated 

for  assessment    $ . 


(Verification  as  in  section  48.) 

(This  form,  properly  filled  out  and  executed,  must  be  in  the  hands  of  the 
collector  of  internal  revenue  for  the  district  in  which  is  located  the  principal 
ofiice  of  the  corporation  making  the  return  on  or  before  March  1.) 

Sec.  51.  Tax   Returns   From    Transportation    Corporations. 

—  Under  the  regulations  established  by  authority  of  the  Federal 
Corporation  Tax  Law  by  the  commissioner  of  internal  revenue, 
with  the  approval  of  the  Secretary  of  the  Treasury,  all  transporta- 
tion companies  must  make  a  return  in  substantially  the  following 
form:     (See  Appendix  X.) 

Form  No.  G36. 

To  be  filled  in  by  Internal  Revenue 
To  be  filled  in  by  Collector.  Bureau. 

List  No Assessment  List 19 ...  . 

Class Page  Line 

District  of Date  Received  19 

UNITED  STATES  INTERNAL  REVENUE. 

Reti'rn  of  Annual  Nkt  Income. 

(Section  38,  Act  of  Congress,  approved  Aiigust  5,  1000.) 

Transport ation  Corporations. 

Rkturn  of  Net  Income  received  during  the  year  ending  December  31.  10.  ., 

by a  corporalion,  the  principal  place  of 

huHinoHH  of  whifli  \h  Vtr.ntrvl  at    in  the  State  of 

1.  Tf)tal  amount  of  paid-up  stock  outstanding  at  close  of  year.      $ 


Tax  Returns.  97 


2.  Total  amount  of  bonded  or  other  indebtedness  at  close  of 
year 

3    Gross  income 

(Gross  income  shall  consist  of  gross  revenue  derived  from 
the  operation  and  management  of  the  business  and  prop- 
erty of  the  corporation  making  the  return,  together  with 
all  amounts  of  income  (including  dividends  received  on 
stock  of  other  corporations,  joint  stock  companies  and 
associations  subject  to  this  tax)  derived  from  all  sources 
as  shown  by  the  entries  on  its  books  from  January  1  to 
December  31  of  the  year  for  which  the  return  is  made.) 


Deductions. 

4.  Total  amount  of  all  the  ordinary  and  necessary  expenses 
of  maintenance  and  operation  of  the  business  and  prop- 
erties of  the  corporation 

(The  deductions  authorized  shall  include  all  expense  items 
under  the  various  heads  acknowledged  as  liabilities  by 
the  corporation  making  the  return  and  entered  as  such  on 
its  books  from  January  1  to  December  31  of  the  year  for 
which  return  is  made.) 
6.    (a)   Total  amount  of  losses  sustained  January 

1  to  December  31 $ 

(6)   Total   amount  of  depreciation  January    1 

to  December  31 

Total    (See  Note  to  No.  4) 

6.  Total    amount   of   interest   January    1    to   December    31   on 

bonded  indebtedness  to  an  amount  not  to  exceed  the 
amount  of  paid-up  capital  at  close  of  year  (See  Note  to 
No.  4.)   

7.  (a)    Total  taxes  paid  January  1  to  December 

31     imposed    under     authority    of    the 
United  States  or  any  State  or  Territory 

thereof $ 

( b )    Foreign  taxes  paid 

Total   (See  Note  to  No.  4.) 

'^.  Amount  received  by  way  of  dividends  upon  stock  of  other 
corporations,  joint  stock  companies,  associations,  and 
insurance  companies  subject  to  this  tax 


Total  deductions $ 

9.  Net  income 

10.  Specific  deductions  from  net  income  allowed  by  law $5,  000  00 


11.  Amount  on  which  tax  at  one  per  centum  is  to  be  calculated 

for  assessment $ 

(Verification  as  in  Section  48.) 

(This  form,  properly  filled  out  and  executed,  must  be  in  the  hands  of  the 
Collector  of  Internal  Revenue  for  the  District  in  which  is  located  the  principal 
office  of  the  corporation  making  the  return,  on  or  before  March  1.) 

Fed.  Corp.  Tax  —  7 


98  Fedekal  Corporation  Tax  Law. 

Sec.  52.  Tax    Returns   From    Manufacturing    Corporations. 

—  Under  the  regulations  established  by  authority  of  the  Federal 
Corporations  Tax  Law  by  the  commissioner  of  internal  revenue, 
with  the  approval  of  the  Secretary  of  the  Treasury,  all  manu- 
facturing corporations  must  make  a  return  in  substantially  the 
following  form:     (See  Appendix  Y.) 

Form  No.   637. 

To  be  Filled  in  by  Internal  Revenue 
To  be  Filled  in  by  Collector.  Bureau. 

List  No Assessment  List   19 ...  . 

Class Page    Line    

District  of Date   Received,    19. .  . . 

UNITED  STATES  INTERNAL  REVENUE. 

Return  of  Annual  Net  Income. 

(Section  38,  Act  of  Congress  approved  August  5,  1909.) 

Manufacturing  Corporations. 

Return  of  Net  Income  received  during  the  year  ending  December  31,  19. .. 

by ,  a  corporation,  the  principal  place  of 

business  of  which  is  located  at   in  the  State  of   

1.  Total  amount  of  paid-up  stock  outstanding  at  close  of  year.     $ 

2.  Total  amount  of  bonded  or  other   indebtedness  outstanding 

at  close  of  year 

3.  Gross  income 

(The  gross  income  received  during  the  year  from  all  sources 

sliall  in  tlic  case  of  a  mainifacturiiig  corporation  consist  of 
tiie  total  amount  asccrtaiiu'd  throiigli  an  accounting  that 
shows  the  difTcrence  betwr<"ii  the  price  received  for  the 
goods  as  sold  ami  tlio  cost  of  such  goods  as  manufactured. 
TIic  cost  of  i,'()U(is  manufactured  shall  be  ascertained  by  an 
addition  of  a  charge  to  the  account  of  tlw  cost  of  goods 
as  manufactured  (luring  the  year  of  the  suiii  of  the  inven- 
tory at  the  end  of  llic  year.  To  this  amount  shoiihl  be 
added  items  of  incoiiH'  n-ccived  during  tlu-  year  from  other 
sources,  including  dividends  r<'ceivc(l  on  stock  of  otiicr  cor- 
porafir)n8,  joint  stnck  companies,  and  associations  sui)ject 
to  lliis  tii\.  In  (lie  (let^^rmination  of  llie  cost,  oi  goods 
mannfaetnred  and  sold  as  above  such  cost  shall  compre- 
hend all  cliarges  for  maiiitennncc  and  ojM'ration  of  manu- 
facturing plant,  but  shall  not  embrace  allowances  for  de- 
preciation or  losses,  which  items  shall  he  ImKimi  account  of 
und«'r  the  jiropcr   heading  above  as  a  deduction.) 


Tax  Returns.  99 


Deductions. 

4.  Total  amount  of  all  the  ordinary  and  necessary  expenses  of 

maintenance  and  operation  of  the  business  and  properties 
of  the  corporation 

(Tlie  deductions  authorized  shall  include  all  expense  items 
under  the  various  heads  acknowledged  as  liabilities  by 
the  corporation  making  the  return  and  entered  as  such  on 
its  books  from  January  1  to  December  31  of  the  year  for 
which  return  is  made.) 

5.  (a)    Total  amount  of  losses  sustained  January 

1  to  December  31 $ 

(6)   Total   amount  of  depreciation  January   1 

to  December  31    

Total  (See  Note  to  No.  4) 

6.  Total   amount   of   interest   January    1    to    December   31    on 

bonded  and  other  indebtedness  to  an  amount  not  to  exceed 
amount  of  paid-up  capital  at  close  of  year  (See  Note  to 
No.  4)   

7.  (o)    Total  taxes  paid  January  1   to  December 

31,  imposed  under  authority  of  the 
United  States  or  any  State  or  Territory 
thereof $ 

( b )    Foreign  taxes  paid   

Total  ( See  Note  to  No.  4 ) 

8.  Amount  received  "by  way  of  dividends  upon  stock  of  other 

corporations,  joint  stock  companies,  associations,  and  in- 
surance companies  subject  to  this  tax 


Total   Deductions $ 

9.  Net  income 

10.  Specific  deduction  from  net  income  allowed  by  law $5,  000  00 

11.  Amount  on  which  tax  at  one  per  centum  is  to  be  calculated 

(Verification  as  in  section  48.) 

(This  form,  properly  filled  out  and  executed,  must  be  in  the  hands  of  the 
Collector  of  Internal  Revenue  for  the  District  in  which  is  located  the  principal 
office  of  the  corporation  making  the  return,  on  or  before  March  1.) 


Sec.  53.  Tax     Returns    From     Mercantile    Corporations. — 

Under  the  regulations  established  by  authority  of  the  Federal 
Corporation  Tax  Law  by  the  commissioner  of  internal  revenue, 
with  the  approval  of  the  Secretary  of  the  Treasury,  all  mercantile 
coT^orations  must  make  a  return  in  substantially  the  following 
form:     (See  Appendix  Z.) 


100  Federal  Corporation  Tax  Law. 

FOBM.  No.  639. 

To  be  Filled  iu  by  Internal  Revenue 
To  be  Filled  in  by  Collector.  Bureau. 

List  No Assessment  List   19.  .  .  . 

Class Page    Line    

J. District  of Date  Received,    19. .  . . 


UNITED  STATES  INTERNAL  REVENUE. 

Retubn  of  Annual  Net  Income. 

(Section  31,  Act  of  Congress,  approved  August  5,  1909.) 

Mercantile  Corporations. 

(Corporations  whose  principal  business  is  buying  and  selling.) 

Return  of  Net  Income  received  during  the  year  ending  December  31,  19.  ., 

by ,  a  corporation,  the  principal  place  of 

business  of  which  is  located  at  in  the  State  of   

1.  Total  amount  of  paid-up  stock  outstanding  at  close  of  year.     $ 

2.  Total  amount  of  bonded  or  other  indebtedness  outstanding 

at  close  of  year 

3.  Gross  Income    

(The  gross  amount  of  income  received  during  the  year  from 

all  sources  shall  in  the  case  of  a  mercantile  corporation 
consist  of  the  total  amount  ascertained  through  inventory 
or  its  equivalent,  which  shows  the  difference  between  the 
price  received  for  goods  sold  and  the  coat  of  goods  pur- 
chased during  the  year,  with  an  addition  of  a  charge  to  the 
account  of  tiie  sum  of  tlic  inv<'ntory  at  tlio  end  of  the 
year.  To  tiiis  amount  should  bo  added  all  items  of  income 
received  during  the  year  from  other  sources,  including 
dividends  received  on  stock  of  other  corporations,  joint 
stock  companies  and  associations,  subject  to  this  ta.x.  In 
determining  this  amount  no  account  shall  \w  taken  of  al- 
lowances for  depreciation  or  losses,  which  items  shall  be 
taken  account  of  under  the  proper  heading  above  as  a  de- 
duction.) 

Deductions. 

4.  Total  amount  of  all  the  onliiiiiry  iind  necessary  expenses  of 

maintenance   and    operation    of    tlir    business    iiiid    proper- 
ties of  the  corporation  ...    

(The  (lednrtions  anfhori/.ed  shall  iyiclnde  all  expense  items 
iinclor  the  various  heads  iieknf)\vl('(l>^f>(l  as  li;ihili(ies  by  the 
roriK)r;il  i(in  making  the  return  .'lud  <'ii1('r<'(I  as  hiicIi  on  its 
bookw  frnni  .Fjinnary  1  to  Deccinlicr  .■{!  of  the  year  for 
whifh  return  is  made.) 


Tax  Returns.  101 

5.  (a)   Total  amount  of  losses  sustained  January 

1  to  December  31 $ 

(b)    Total  amount  of  depreciation   January   1 

to  December  31   

Total  ( See  Note  to  No.  4) ' 

6.  Total  amount  of  interest  January     1    to    December  31   on 

bonded  and  other  indebtedness  to  an  amount  not  to  ex- 
ceed amount  of  paid-up  capital  at  close  of  year  (See 
Note  to  No.  4) 

7.  (a)    Total  taxes  paid  January  1   to  December 

31,  imposed  under  authority  of  the 
United  States  or  any  State  or  Territory 
thereof $ 

{ h )    Foreign  taxes  paid 

Total  (See  Note  to  No.  4) 

8.  Amount  received  by  way  of  dividends  upon  stock  of  other 

corporations,  joint  stock  companies,  associations  and  in- 
surance companies  subject  to  this  tax 


Total  Deductions 
9.  Net  Income   


10.  Specific  deduction  from  net  income  allowed  by  law $5,000  00 

11.  Amount  on  which  tax  at  one  per  centum  is  to  be  calculated 

for  assessment    

(Verification  aa  in  section  48.) 

(This  form,  properly  filled  out  and  executed,  must  be  in  the  hands  of  the 
collector  of  internal  revenue  for  the  district  in  which  is  located  the  principal 
ofiice  of  the  corporation  making  the  return  on  or  before  March  1.) 


Sec.  54.  Tax  Returns  From  Miscellaneous  Corporations. — 

Under  the  regulations  established  by  authority  of  the  Federal  Cor- 
poration Tax  Law,  by  the  commissioner  of  internal  revenue,  with 
the  approval  of  the  Secretary  of  the  Treasury,  all  miscellaneous 
corporations  must  make  a  return  in  substantially  the  following 
form:     (See  Appendix  AA.) 

Form  No.  638. 

To  be  Filled  in  by  Internal  Revenue 
To  be  Filled  in  by  Collector.  Bureau. 

List  No Assessment  List   19.  .  . . 

Class Page    Line    

District  of Date  Received  and  filed 19 


102  Federal  Corporation  Tax  Law. 

UNITED  STATES  INTERNAL  REVENUE. 

Return  of  Annual  Net  Income. 

(Section  38,  Act  of  Congress  approved  August  5,  1909.) 

Miscellaneous  Corporations. 

Retubn  of  Net  Income  received  during  the  year  ending  December  31,  1ft. ., 

by ,  a  corporation,  the  principal  place  of 

business  of  which  is  located  at  in  the  State  of   

1.  Total  amount  of  paid-up  stock  outstanding  at  close  of  year.      $ 

2.  Total  amount  of  bonded  or  other  indebtedness  outstanding  at 

close  of  year  

3.  Gross  Income    

(Gross  income  shall  consist  of  the  total  of  the  gross  reve- 
nue derived  from  the  operation  and  management  of  its 
business  and  properties,  together  with  all  amounts  of  in- 
come from  other  sources,  including  dividends  on  stock 
of  other  organizations  subject  to  this  special  excise  tax 
received,  as  shown  by  entries  upon  its  books  from  Janu- 
ary 1  to  December  31  of  the  year  for  which  return  is 
made. ) 

Deductions. 

4.  Total  amount  of  all  the  ordinary  and  necessary  expenses  of 

maintenance  and  operation  of  the  business  and  properties 

of  the  corporation • 

(The  deductions  authorized  shall  include  all  expense  items 
under  the  various  heads  acknowledged  as  liabilities  by  the 
corporation  making  the  return  and  entered  as  such  on  its 
books  from  January  1  to  December  31  of  the  year  for 
which  return  is  made.) 

5.  (o)   Total   amount  of   loss   sustained   January 

1  to  Doceml)er  31 $ 

(6)   Total  amount  of  depreciation   January   1 

to  December  31    

Total   ( See  Note  to  No.  4) 

6.  Total    amount   of    interest    January    1    to    December    31    on 

bonded    iniicbt^-ilm'SH   to   an     amount     not    to     exceed    the 

amount  of  paid  up  ca])ital  at  close  of  year 

(See  Note  to  \o.  4.) 

7.  (a)    Total  taxes   paid  January    1    to   Deceml>er 

her  31,  imposed  under  authority  of  the 
rnit<'(l  States  or  any  State  or  Territory 
thereof $ 

{b)    Foreign  tiixes  paid 

Total   (Sec  Note  to  \o.  4) 


Tax  IIetubns.  103 

8.  Amount  received  by  way  of  dividends  upon  stock   if  other 
corporations,  joint  stock  companies,  associations  and   in 
surance  companies  subject  to  this  tax 


Total  Deductions $ 

9.  Net  Income   

10.  Specific  deduction  from  net  income  allowed  by  law $5,000  00 

11.  Amount  on  which  tax  at  one  per  centum  is  to  be  calcu- 

lated  


(Verification  as  in  section  48.) 

(This  form,  properly  filled  out  and  executed,  must  be  in  the  hands  of  the 
collector  of  internal  revenue  for  the  district  in  which  is  located  the  principal 
offioe  of  the  corporation  making  the  return  on  or  before  March  1.)  ' 


104  Fedeual  CoBPOfiATiON  Tax  Law. 


CHAPTER  VI. 

FUNDAMENTAL  BASIS  OF  THE  FEDERAL  CORPORATION  ACT. 

Sec.  55.  What    Is    the    Fundamental    Basis   of   the    Federal 

Corporation  Tax.  —  The  fundamental  and  controlling  principle 
to  be  observed  in  the  practical  operation  of  the  federal  corpora- 
tion tax  is  that  which  treats  the  whole  act  as  embodvinar  an  excise 
tax,  the  amount  of  which  is  measured  by  the  income  of  the  cor- 
poration, company  or  association  subject  to  its  terms. 

In  the  words  of  the  United  States  Supreme  Court  in  Flint  v. 
Stone  Tracey  &  Company,  220  U.  S.  107,  "  it  is  apparent  that 
the  tax  is  imposed  not  upon  the  franchises  of  the  corporation, 
irrespective  of  their  use  in  business,  nor  upon  the  property  of  the 
corporation,  but  upon  the  doing  of  corporate  or  insurance  business 
with  respect  to  the  carrying  on  thereof  in  a  sum  equivalent  to  1 
per  centum  upon  the  entire  net  income  over  and  above  $5,000 
received  from  all  sources  during  the  year;  that  is,  when  imposed 
in  this  manner  it  is  a  tax  upon  the  doing  of  business  with  the 
advantages  whicli  inhere  to  the  peculiarities  of  corporate  or  joint 
stock  organizations  of  the  character  described.  As  the  latter 
organizations  share  many  benefits  of  corporate  organization,  it 
may  be  described  generally  as  a  tax  upon  the  doing  of  business  in 
a  corporate  capacity." 

Ticaring  tliis  in  mind,  it  next  lK?comes  projx^r  to  determine  how 
tlic  taxahh'  income  of  sudi  corporations,  companies  or  associations 
is  to  1k>  f'alcnhited.  Before  doing  this  it  will  be  ])roper  to  lay  a 
firrri  foiiii(hiti<iii  I'oi-  wliat  is  to  follow,  by  (Jctining  the  torms  em- 
|)lo_v((i  ill  the  act,  ill  [xiiiit  iiiir  out  tiic  .successive  stops  to  bo  fol- 
iowcfl  in  oriicr  to  ascertain  the  "  net  income"  upon  which  the  tax 
itfiolf  is  levied. 

First,  111  n-  ohtiiiii  a  h'gal  definition  of  the  term  "income"  as 
used  in  IIk^  ad  under  discussion. 


Fundamental  Basis  of  FKDEitAL  Corporation  Act.      105 

Sec.  56.  Definition  of  Income.  —  The  Federal  Corporation 
Tax  Law  (paragrapli  2,  lines  1  to  28)  j)rovides  that  the  net  income 
upon  which  the  excise  tax  itself  is  measured,  shall  be  ascertained 
by  making  certain  deductions  (as  enumerated  in  the  act)  from  the 
gross  amount  of  the  income  of  the  corjwration,  joint  stock  com- 
pany or  association,  or  insurance  company  against  which  the  tax 
is  assessed  as  the  same  may  have  been  received  within  the  tax  year 
(January  1  to  December  31),  from  all  sources. 

It  will  be  seen  that  it  is  a  matter  of  primary  importance  to 
obtain  at  the  start  an  accurate  and  comprehensive  definition  of 
the  word  "  income  "  as  used  in  the  act. 

Income  is  the  revenue  received  by  the  company  from  any 
source  which  originates  through  investment  of  its  funds,  or  the 
utilization  and  exploitation  of  its  capital  in  carrying  on  the  par- 
ticular business  for  which  such  company  was  organized  or  formed. 
The  fair  test  to  be  employed  in  any  case  in  determining  whether 
certain  funds  received  by  the  company  are  to  be  treated  as  income, 
within  the  meaning  of  the  act  is  to  ascertain  whether  such  funds 
proceed  from  the  investment  or  utilization  of  the  capital  of  the 
company  from  whatsoever  source  derived. 

Sec.  57.  Meaning  of  the  Phrase  "  Income  Received "  In 
Paragraph  2  of  the  Act.  —  There  is  no  particular  significance  in 
the  use  of  the  word  "  received  "  as  found  therein.  It  simply 
serves  to  distinguish  moneys  which  are  due  the  company  but  not 
collected,  from  those  which  have  been  actually  paid  in.  The 
regulations  of  the  treasury  department  (No.  31,  T.  D.  1571,  De- 
cember 3,  1909,  see  Appendix  C.)  present  certain  definitions  and 
rules  for  determining  the  gross  income  of  the  various  classes  of 
corporations.     These  briefly  stated  are  as  follows : 

lA.  Banks  and  other  financial  institutions.  —  Gross  income  consists  of 
the  gross  revenue  derived  from  the  operation  and  management  of  the  business 
and  property  of  the  corporation  making  the  return,  together  with  all  amount?? 
of  income  (including  dividends  received  on  stock  of  other  corporations,  sub 
ject  to  this  tax)  derived  from  all  other  sources,  as  shown  by  the  entries  on 
its  books  from  January  1  to  December  .31  of  the  year  for  which  return  is 
made. 

IB.  Insurance  companies.  —  Gross   income    consists    of    the    gross   revenue 
derived  from  the  operation  and  management  of  the  business  and  property  of 


106  Federal  Corporation  Tax  Law. 

the  corporation  making  the  return,  together  witli  all  amounts  of  income  ;i.i- 
cluding  dividends  received  on  stock  of  other  corporations,  joint-stock  com- 
panies, associations  and  insurance  companies  subject  to  this  tax)  derived 
from  all  other  sources,  as  shown  by  the  entries  on  its  books  from  January  1 
to  December  31  of  the  year  for  which  return  is  made. 

2.  Transportation  companies.  —  Gross  income  consists  of  the  gross  revenue 
derived  from  the  operation  and  management  of  the  business  and  property  of 
the  corporation  making  the  return,  together  with  all  amounts  of  income  (in- 
cluding dividends  received  on  stock  of  other  corporations,  joint  stock  com- 
panies, associations  and  insurance  companies  subject  to  this  tax)  derived  from 
all  other  sources,  as  shown  by  the  entries  on  its  books  from  January  1  to 
December  31  of  tlie  year  for  which  return  is  made. 

3.  Manufacturing  companies.  —  Gross  income  received  during  the  year 
from  all  sources  will  consist  of  the  total  amount,  ascertained  through  an  ac- 
counting, that  shows  the  difference  between  the  price  received  for  the  goods 
as  sold  and  the  cost  of  such  goods  as  manufactured.  The  cost  of  goods  manu- 
factured shall  be  ascertained  by  an  addition  of  a  charge  to  the  account  of  the 
cost  of  goods  as  manufactured  during  the  year  of  the  sum  of  the  inventory 
at  beginning  of  the  year  and  a  credit  to  the  account  of  the  sum  of  the  inventory 
at  beginning  of  the  year  and  a  credit  to  the  account  of  the  sum  of  the  in- 
ventory at  the  end  of  the  year.  To  this  amount  should  be  added  all  items  of 
income  received  during  the  year  from  other  sources,  including  dividends  re 
ceived  on  stock  of  other  corporations,  joint  stock  companies,  associations  and 
insurance  companies  subject  to  this  tax.  In  the  determination  of  the  cost  of 
goods  manufactured  and  sold  as  above,  such  cost  shall  comprehend  all  charge* 
for  maintenance  and  operation  of  manufacturing  plant,  but  shall  not  embrace 
allowances  for  depreciation  of  property,  nor  for  losses  sustained  which  are 
to  be  taken  acctnint  of  in  ascertaining  the  net  income  subject  to  tax  under 
the  proper  heading  in  the  authorized  deductions. 

4.  Mercantile   companies.  —  Gross    amount   of    income    received    during    th^' 
year  from  all  sources  consists  of  the   total   amount  ascertained   through   in 
vrntory,  or  its  e(|uivalpnt,   whicli   shows  the  difference  between   the  price  re- 
c  ived  for  goods  sold  and  tlie  costs  of  gootls  purchawd  during  the  year,  with 
an  audition  of  a  charge  to  the  account  of  the  sum  of  the  inventory  at  be- 
ginning of  the  year  and  a  credit  to  the  account  of  the  sum  of  the  inventory 
at  the  end  of  the  year.     To  this  amount  should  be  added  all  items  of  income 
received  during  the  year   from  otlicr   sources,   inclusive   of  dividends   rec^'ived 
on  stock  of  otlier  corporations,  joint  stock  companies,  associations  and  insur- 
ance companies  subject  to  this  tax.      In  determining  this  amount  no  account 
Khali   be  tak«'n  of  allowances  for  depri'cialion   of  pr()()crly.  nor  for   losses  sus 
tairied,  which  are  to  be  taken  account  of  in  ascertaining  the  net  income,  sub 
jeet  to  tax  under  the  proj)er  heading  in  the  authorized  deductions. 

.').  MiseellaiKdUH.  —  Gross  income  consists  of  tli<'  gross  revenue  derived 
from  the  opera t ion  and  manngeiiM-nt  of  the  b\isiness  and  prop«'rty  of  the  cor- 
poration making  the  return,  together  with  all  annnints  nf  income  (includinfr 
diviilemis  received  on  stock  of  other  corporations,  joint  stock  companies,  asso 
(•i,ttion4  imd  iri'^iir:iri(r'  (•ompani«'H  subject  to  this  tax)  derived  from  all  other 
HoiirccH  as  shown  by  the  f-ntrieH  on  the  books  from  January  1  to  December  SI 
of  the  vear  for  which  return  is  made. 


Fundamental  Basis  of  Fkdkkal  Coepokation  Act.      107 

It  will  be  noted  from  these  definitions  that  gross  income  is  practically  the 
fiame  as  gross  profits,  tlu-  only  difTerence  being  that  gross  income  is  more 
inclusive,  embracing  as  it  does  not  only  gross  profits  of  tlie  corporation,  joint 
stock  company  and  association  itself,  but  also  all  amounts  of  income  received 
from  other  sources.  It  is  immaterial  whether  any  item  of  gross  income  is 
evidenced  by  cash  receipts  during  the  year  or  in  such  other  manner  as  to 
entitle  it  to  proper  entrj'  on  the  books  of  the  corporation  from  January  1  to 
December  31  of  the  year  for  which  return  is  made. 

Sec.  58.  Meaning  of  the  Phrase  "  From  All  Sources  "  Found 
In  Paragraph  2  of  the  Act.  —  The  purpose  of  adding  the  words 
"  from  all  sources  "  to  the  term  "  gross  income "  is  to  include 
therein  not  only  such  income  as  is  derived  from  the  ordinary  and 
routine  business  of  the  company,  but  serves  to  include  therein  the 
income  derived  from  investments,  sale  of  capital  assets  and  income 
received  from  property  which  in  itself  would  be  exempt  from 
federal  taxation. 

On  this  general  subject  the  United  States  Supreme  Court  in 
Flint  V.  Stone  Tracey  &  Company,  220  U.  S.  107,  spoke  as  fol- 
lows: 

This  tax,  it  is  expressly  stated,  is  to  be  equivalent  to  1  per  centum  of 
the  entire  net  income  over  and  above  $5,000  received  from  all  sources  during 
the  year.  This  is  the  measure  of  the  tax  explicitly  adopted  by  the  statute. 
The  income  is  not  limited  to  such  as  is  received  from  property  used  in  the 
business,  strictly  speaking,  but  is  expressly  declared  to  be  upon  the  entire 
net  income  above  $5,000  from  all  sources,  excluding  the  amounts  received  as 
dividends  on  stock  in  other  corporations,  joint  stock  companies,  or  associa 
tions,  or  insurance  companies  also  subject  to  the  tax.  In  other  words,  the 
tax  is  imposed  upon  the  doing  of  business  of  the  character  described,  and  the 
measure  of  the  tax  is  to  be  the  income,  with  the  deduction  stated,  received 
not  only  from  property  used  in  business,  but  from  every  source.  This  view 
of  the  measure  of  the  tax  is  strengthened  when  we  note  that  as  to  organiza- 
tions under  the  laws  of  foreign  countries  the  amount  of  net  income  over  and 
above  $5,000  includes  that  received  from  business  transacted  and  capital 
invested  in  the  United  States,  the  Territories,  Alaska  and  the  District  of 
Columbia. 

It  is  further  strengthened  when  the  subsequent  sections  are  considered  as 
to  deductions  in  ascertaining  net  income  and  requiring  returns  from  those 
subject  to  the  deductions  from  the  gross  amount  of  income  received  within  the 
year  "from  all  sources;"  and  the  return  to  be  made  to  the  collector  of 
internal  revenue  under  the  third  section  is  required  to  show  the  gross  amount 
of  the  income  received  during  the  year  "  from  all  sources."  The  evident  piir- 
pose  is  to  secure  a  return  of  the  entire  income,  with  certain  allowances,  and 
de<]uctions,  which  do  not  suggest  a  restriction  to  income  derived  from  property 
actively  engaged  in  the  business.     This  interpretation  of  the  act,  as  resting 


108         Federal  Corporation  Tax  Law. 

upon  the  doing  business,  is  sustained  by  the  reasoning  in  Spreckels  Sugar 
Refining  Co.  v.  McClain,  192  U.  S.  397,  in  which  a  special  tax  measured  by 
the  gross  rec€ipts  of  the  business  of  refining  oil  and  sugar  was  sustained  as 
an  excise  in  respect  to  the  carrying  on  or  doing  of  such  business. 


Sec.  59.  Classification  of  the  Elements  Which  Go  to  Make 
Up  the  Gross  Income  of  Corporations  and  Companies  Subject 
to  the  Tax.  —  A  general  guide  for  determining  the  elements 
which  go  to  make  up  the  gross  income  of  companies  subject  to  the 
federal  corporation  tax  can  be  found  within  that  indicated  upon 
the  printed  forms  for  return  of  annual  net  income  prepared  by 
the  commissioner  of  internal  revenue  (see  Appendix,  forms  U-Z), 
to  wit: 

The  gross  income  shall  consist  of  the  total  of  the  gross  revenue  derived  from 
the  operation  and  management  of  the  company's  business  and  properties, 
together  with  all  amounts  of  income,  including  dividends  on  stock  of  other 
corporations,  joint  stock  companies  and  associations  subject  to  the  tar, 
derived  from  all  sources  as  shown  by  the  entries  on  the  company's  books  from 
January  1st  to  December  Slst  of  the  year  for  which  the  return  is  made." 

A  far  better  guide,  however,  is  found  in  the  bulletin  of  the 
commissioner  of  internal  revenue  under  date  of  December  3,  1909 
(T.  R.  1571,  see  Ap]x;ndix  C),  which  reads  as  follows: 

The  following  definitions  and  rules  are  given  for  determining  the  groaa 
income  of  the  various  claBso.s  of  corporations: 

lA.  Banks  and  other  financial  institutions.  —  Gross  income  consists  of  the 
gross  revenue  derived  from  the  operation  and  management  of  the  business  and 
property  of  the  corporation  making  the  return,  togethor  witii  all  amounts  of 
income  (including  dividends  recoivod  on  stock  of  otlier  corjiorations,  joint 
stock  coiiipaiiics,  associations  and  insurance  companies  subject  to  this  tax) 
derived  from  all  other  sources,  as  shown  by  the  entries  on  its  books  from 
January  1  t^)  December  .31  of  the  year  for  which  return  is  made. 

1  H.    Insurance  companies.  —  Same  as  lA  above. 

2.  Traiisjiortaticn  companies.  —  Same  as  lA  al)ove. 

3.  Manufacturing  companies.  —  Gross  income  received  during  the  year 
from  all  sources  will  consist  of  the  total  amount,  ascertained  through  an  ao- 
counfing,  tliat  shows  the  (!i(Ter('nr<'  between  (he  jirice  r('c<'iv('d  for  tlie  goodH 
as  Holil  and  the  cost  of  snch  goods  as  niainifactiircil.  'I'lio  cost  of  goods  nuinu- 
factured  shall  l>c  ascertained  by  an  addition  of  a  charge  to  the  account  of  the 
cf»Ht  of  the  goods  as  ni.'iriiif.icl  iiicd  (luting'  tlic  yi'iir  of  the  sum  of  the  iiuMMitory 
at  beginning  of  the  year  and  a  credit  to  the  account  of  the  sum  of  tlio 
inventory  at,  th"  end  of  the  year.  To  tliis  amount  sliould  be  added  all  item"? 
of  income  received  during  the  year  from  other  sources,  including  dividends 
received  on  stock  of  other  corporations,  joint  stock  companies,  associations  and 


Fundamental  Basis  of  Fedkraj.  Corporation  Act.     109 

insurance  companies  subject  to  tliis  tax.  In  the  determination  of  the  cost 
of  goods  manufactured  and  sold  as  above  such  cost  shall  comprehend  all 
charges  for  maintenance  and  operation  of  manufacturing  plant,  but  shall  not 
embrace  allowances  lor  depreciation  of  property  nor  for  losses  sustained 
which  are  to  be  taken  account  of  in  ascertaining  the  net  income  subject  to  tax 
under  the  proper  heading  in  the  authorized  deductions. 

4.  Mercantile  companies.  —  Gross  amount  of  income  received  during  the 
year  from  all  sources  consists  of  the  total  amount  ascertained  through  in- 
ventory, or  its  equivalent,  which  shows  the  difference  between  the  price  re- 
ceived for  goods  sold  and  the  cost  of  goods  purchased  during  the  year,  witli 
an  addition  of  a  charge  to  the  account  of  the  sum  of  the  inventory  at  beginning 
of  the  year.  To  this  amount  should  be  added  all  items  of  income  received 
during  the  year  from  other  sources,  inclusive  of  dividends  received  on  stock 
of  other  corporations,  joint  stock  companies,  associations  and  insurance  com- 
panies subject  to  this  tax.  In  determining  this  amount  no  account  shall  be 
taken  of  allowances  for  depreciation  of  property,  nor  for  losses  sustained, 
which  are  to  be  taken  account  of  in  ascertaining  the  net  income  subject  to  tax 
under  the  proper  heading  in  the  authorized  deductions. 

5.  Miscellaneous.  —  Gross  income  consists  of  the  gross  revenue  derived  from 
the  operation  and  management  of  the  business  and  property  of  the  operation 
and  management  of  the  business  and  property  of  the  corporation  making  the 
return,  together  with  all  amounts  of  income  ( including  dividends  received  on 
stock  of  other  corporations,  joint  stock  companies,  associations  and  insurance 
companies  subject  to  this  tax)  derived  from  all  other  sources  as  shown  by 
the  entries  on  the  books  from  January  1  to  December  31  of  the  year  for  which 
return  is  made. 

It  will  be  noted  from  these  definitions  that  gross  income  is  practically  the 
same  as  gross  profits,  the  only  difference  being  that  gross  income  is  more 
inclusive,  embracing  as  it  does  not  only  gross  profits  of  the  corporation,  joint 
stock  company  and  association  itself,  but  also  all  amounts  of  income  received 
from  other  sources.  It  is  immaterial  whether  any  item  of  gross  income  is 
evidenced  by  cash  receipts  during  the  year  or  in  such  other  manner  as  to 
entitle  it  to  proper  entry  on  the  books  of  the  corporation  from  January  1  to 
December  31  of  the  year  in  which  return  is  made. 

Sec.  60.  Income  From  Business.  —  By  "  income  from  busi- 
ness "  is  to  be  understood  all  moneys  received  from  the  carrying 
on  of  the  particular  business  for  which  the  company  subject  to  the 
tax  was  incorporated  or  organized.  In  this  connection  attention  is 
called  to  the  treasury  department  regulations  (T.  D.  1588)  under 
date  of  January  24,  1910,  see  Appendix  F.).  Under  the  regula- 
tion here  referred  to  the  commissioner  of  internal  revenue  speaks 
as  follows : 

Sir.  —  Your  letter  dated  the  19th  instant  has  been  received,  in  which  you 
ask  certain  questions  relative  to  making  returns  under  the  provisions  of  sec- 
tion 38,  Act  of  August  5,  1909.     You  state: 


110         Federal  Corporation  Tax  Law. 

In  the  first  place,  relative  to  a  manufacturing  company,  in  your  paragraph 
3  on  page  8  of  the  laws  and  regulations,  you  say:  "Cost  of  goods  manufac- 
tured shall  be  ascertained  by  the  addition  of  a  charge  to  the  account  of  the 
cost  of  goods  as  manufactured  during  the  year  of  the  sum  in  the  inventory 
at  the  beginning  of  the  year,  and  a  credit  to  the  account  of  the  sum  in  the 
inventory  at  the  end  of  the  year."  Does  this  mean  that  the  cost  must  be 
ascertained  from  tlie  price  of  tlie  raw  materials  and  the  amount  of  labor 
expended,  irrespective  of  overhead  charges,  or  should  overhead  charges  be 
included  in  the  cost,  and  should  the  addition  then  be  made  to  the  total  net 
worth  of  the  concern  as  shown  by  the  inventory  of  the  previous  year  and  that 
subtracted  from  the  net  worth  of  the  concern  at  the  end  of  the  year;  or  in 
what  way  is  this  section  construed  ?  " 

In  reply,  you  are  advised  that  for  the  purpose  of  making  a  correct  return 
in  accordance  with  the  provisions  of  section  3  of  the  Act  of  August  5,  1909,  it 
is  necessary  to  follow  closely  the  well-established  commercial  rules  for  keep- 
ing the  accounts  of  the  business  of  manufacturers.  In  keeping  such  accounts 
in  a  scientific  manner  it  is  well  understood  by  all  bookkeepers  that  if  an  in- 
ventory is  taken  on  December  31,  the  end  of  the  calendar  year,  the  credits 
entered  as  balances  in  the  several  ledger  accounts  show  the  assets  that  such 
corporation  has  on  hand,  and  hence  the  instructions  in  "  Note  A,"  at  the 
bottom  of  the  printed  Form  637  state  that  "  the  cost  of  the  goods  manufac- 
tured shall  be  ascertained  by  an  addition  of  a  charge  (debit)  to  €lie  account 
of  the  goods  as  manufactured  during  the  year  of  the  sum  of  the  inventory  at 
the  beginning  of  the  year."  All  credit  balances  above  referred  to  are  trans- 
ferred to  the  debit  side  of  such  accounts  when  the  same  are  reopened  on  com- 
mencing business  on  the  first  of  the  year,  and  the"  addition  of  a  charge,"  as 
noted  above,  is  thus  made  to  the  several  accounts  that  are  debited  with  the 
cost  of  goods  manufactured  during  the  year.  The  credit  to  the  account  is 
then  made  at  the  close  of  the  year  when  the  inventory  is  taken. 

The  provisions  of  the  law  require: 

1.  That  the  return  shall  show  tlie  gross  income  (profit)  received  during  the 
year,  whicli  i.s  reported  in  item  3  on  Form  037). 

2.  All  the  necessary  expenses  in  the  maintenance  and  operation  of  the  busi- 
ness and  properties,  wliich  include  labor,  fuel,  rentals,  insurance,  etc.,  shown 
in  iU'm  4. 

3.  Losses  Hustaiiied  during  tlic  year  and  not  eonipensatcd  by  insurance  or 
otherwise,  including  a  reasonable  allowance  for  depreciation,  shown  in  item 
r>A  and  I?. 

4.  Interewt  on  bondi-d  or  otlior  indeljledness  to  an  amount  not  exceeding 
the  paid  up  ea[)ital  stock  shown  in  item  (!. 

."i.   All  sums  imposed  for  taxes  during  tlie  year,  sliown   in  item  7. 

0.  All  ;iiri(nin<s  received  by  it  as  divich-nds  upon  stock  of  other  corporations, 
etc.,  subject  to  the  tax   imjxiHcd,  as  shown   in   item  8. 

To  make  a  correct  return  il  is  necessary  for  the  accountant  to  know: 

1.  The  exact  reBonrees  and  liabilities  of  the  corporation,  both  on  January  1 
and   December  .'!!  nf  (lie  year  covered  by  the  same. 

2.  A    full   Htat<'nienf    of    the   biisines'-;    (rans!ict.<'(l    during    the    yrnr.      For    ox 
ample:       If  a  nianiifacturinc  oriior.it  ion  has  on  haml  :it  the  beginning  of  the 
year  as  resourceB,  raw  materials,   in  process,  finished  product,  cash,  bills  re- 


FUNDAMKNTAL    BaSIS    OF    FliDKKAI.    CORPORATION     AcT.        Ill 

ceivable,  accounts  icccivublc,  etc.,  making  up  tlic  total  usaets  of  the  com- 
pany, a  business  transaction  that  results  in  exchanging  these  assets,  or  any 
part  of  them,  for  anything  of  equal  value,  does  not  produce  income. 

Raw  niaterial.s,  being  of  the  capital  assets  of  the  company,  are  changed  in 
form  by  the  addition  of  diilerent  items  of  e.Kpense  to  jjroduce  another  form 
of  asset,  the  finished  product,  and  hence  the  method  of  making  up  the  return 
as  follows:  The  gross  income  from  the  manufacturing  business  reported  in 
item  3  con.sists  of  the  difTerence  between  the  coat  of  the  assets  as  material 
and  the  selling  price  of  the  assets  as  finished  product.  The  selling  price  of  the 
finished  product  is  ascertained  as  follows:  The  cost  of  the  raw  material  plus 
all  expenses  shown  in  items  4,  5,  6  and  7,  plus  per  cent,  of  profit,  and  while 
all  these  items  of  expense  are  as  surely  a  part  of  the  finished  product  as  la 
the  value  of  the  raw  material,  yet  as  such  items  are  expenses,  and  no  assets, 
they  are  segregated  and  reported  as  deductions  in  items  4,  5,  6  and  7,  in  order 
to  assist  the  government  officer  in  his  comparison  and  verification  of  the  ac- 
curacy of  the  return. 

In  making  up  the  gross  income  to  be  reported  in  item  3  the  cost  of  the 
goods  manufactured  shall  be  ascertained  by  the  addition  of  a  charge  to  the 
account  of  the  cost  of  the  goods  as  manufactured  during  the  year. of  the  sum 
of  the  inventory  at  the  beginning  of  the  year  and  a  credit  to  the  account  of 
the  sum  of  the  inventory  at  the  end  of  the  year.  To  this  amount  should  be 
added  all  items  of  income  received  during  the  year  from  other  sources,  in- 
eluding  dividends  received  on  stock  of  other  corporations  subject  to  this  tax. 

In  making  the  inventory  on  December  31  of  each  year  the  appreciation  or 
depreciation  in  the  value  of  the  raw  material  on  hand  should  be  ascertained, 
as  well  as  that  of  the  finished  product,  and  this  loss  or  gain,  as  the  case  may 
be,  is  included  in  the  account  of  the  closing  calendar  year.  These  articles, 
the  raw  material,  material  in  process  of  manufacture,  and  the  finished  product, 
constitute  at  the  beginning  of  the  year  succeeding  the  inventory  the  capital 
assets  of  the  company,  and  hence  under  .the  rule  in  paragraph  2,  page  9,  of 
Regulation  31,  any  increase  or  decrease  in  value  accruing  at  a  time  prior  to 
January  1  of  the  calendar  year  for  which  return  is  made  cannot  be  taken 
as  a  part  of  the  gross  income  for  that  year,  but,  as  noted  above,  such  increase 
or  decrease  in  value  should  be  included  in. the  account  of  the  prior  calendar 
year. 

The  rules,  as  hereinbefore  stated,  relative  to  manufacturing  corporations, 
also  apply  to  mercantile  corporations,  and  it  is  not  at  all  material  in  making 
a  return  for  the  year  1909,  if,  as  you  state,  the  goods  were  purchased  prior  to 
that  time.  On  January  1,  1909,  the  goods  referred  to  constitute  capital  as- 
sets at  the  invoiced  value,  and  only  the  profits  on  the  same,  if  sold  during 
the  year,  are  taken  as  gross  income,  or  if  not  all  sold  during  the  year,  gross 
income  is  found  by  an  addition  to  the  credit  side  of  the  account  of  the  sum 
of  the  inventory  at  the  close  of  the  year. 

When  a  book  account  is  shown  to  be  worth  less  than  its  face  value,  and 
the  loss  is  evidenced  by  an  entry  on  tlie  debit  side  of  the  loss  and  gnin 
account  in  the  books  of  the  corporation,  thereby  decreasing  the  gross  profi; 
during  the  year,  the  amount  of  such  loss  is  a  proper  deduction  in  item  5  of 
the  return. 

The  making  of   an   accurate   return   in   accordance   with   the   law   and   the 


112        Federal  Corporation  Tax  Law. 

regulations  should  present  no  difficulties  to  an  expert  bookkeeper  and  account- 
ant who  has  made  a  careful  study  of  the  subject. 

Respectfully, 

Royal  E.  Cabell, 

Commissioner. 

The  commissioner  of  internal  revenue  has  taken  the  position 
(Internal  Ivevenue  Regulations,  December  31,  1909,  article  2, 
sec.  5)  that  it  is  immaterial  whether  an  item  of  gross  income  ic 
evidenced  by  cash  receipts  during  the  year,  or  in  such  other 
manner  as  to  entitle  it  to  proper  entry  on  the  books  of  the  cor- 
poration from  January  1  to  December  31  of  the  year  in  which  the 
return  is  made. 


Sec.  61.  Income  From  Investment.  —  Under  the  instructions 
issued  by  the  commissioner  of  internal  revenue  (see  forms,  return 
of  annual  net  income,  Appendix  Nos.  U-Z)  the  income  received 
by  a  company  from  investment  of  its  capital  outside  of  the  im- 
mediate operation  of  its  business  must  be  included  in  the  term 
"  gross  income." 

Stock  issued  in  payment  of  property  purchased  represents  a 
capital  investment.  (Treasury  Regulations,  T.  D.  1606,  March 
29,  1910,  see  Appendix  K.) 

Sec.  62.  Income  From  Capital  Invested  In  Personal  Prop- 
erty. —  Royalties  on  patent  rights  should  properly  be  reported  as 
income  derived  from  capital  invested  in  personal  propertv.  (T. 
D.  March  29,  1910,  No.  1606,  see  Appendix  K.) 

Sec.  63.  Income  From  Real  Estate.  —  Income  from  capital 
invested  in  real  estate  and  not  cinjiloycd  directly  in  the  operations 
of  the  comj)any,  should  be  included  in  making  up  the  amount  of 
gross  iiicoiiie  of  any  company  subject  to  tlie  tax.  Profits  realized 
on  sale  <»f  real  estate  during  the  year,  as  well  ns  increase  in  the 
value  (if  unsold  ])roperty,  should  1m>  includcMl  in  making  up  the 
I. UK. Milt  u\'  the  gross  income.  (T.  I).  March  29,  1910,  No.  1606, 
see  ApiK-ndix  K.) 

Receipts  during  the  year  iroui    lands  sold   on    the   installment 


Fundamental  Basis  of  Federai.  Cokpobation  Act.     113 

plan  should  be  included  in  making  up  the  gross  income  in  that 
particular  year.  (T.  R  March  29,  1910,  No.  1606,  see  Appendix 
K.) 

Mortgaged  real  estate  should  be  inventoried  at  its  full  value 
and  the  amount  of  mortgage  reported  as  indebtedness. 

Sec.  64.  Income  From  Sale  of  Capital  Assets.  —  With  re- 
spect to  the  sale  of  capital  assets,  the  commissioner  of  internal 
revenue  has  issued  the  following  bulletin:  (T.  R.  1571,  Decem- 
ber 3,  1909,  see  Appendix  C.) 

In  ascertaining  income  derived  from  the  sale  of  capital  assets,  if  the  as- 
sets were  acquired  subsequent  to  January  I,  1909,  the  difference  between  the 
selling  price  and  the  buying  price  shall  constitute  an  item  of  gross  income 
to  be  added  to  or  subtracted  from  gross  income  according  to  whether  the  sell- 
ing price  was  greater  or  less  than  the  buying  price.  If  the  capital  assets 
were  acquired  prior  to  January  1,  1909,  the  amount  of  increment  or  deprecia- 
tion representing  the  difference  between  the  selling  and  buying  price  is  to  be 
adjusted  so  as  to  fairly  determine  the  proportion  of  the  loss  or  gain  arising 
subsequent  to  January  1,  1909,  and  which  proportion  shall  be  deducted  from 
or  added  to  the  gross  income  for  the  year  in  which  the  sale  was  made.  But 
for  the  purpose  of  determining  the  selling  price,  as  provided  in  this  section, 
there  shall  be  added  to  the  price  actually  realized  on  sale  any  amount  which 
has  already  been  set  aside  and  deducted  from  gross  income  by  way  of  depre- 
ciation as  defined  in  article  4  and  has  not  been  paid  out  in  making  good  such 
depreciation  on  the  property  sold. 

Where  a  corporation  is  engaged  in  carrying  on  more  than  one  class  of  busi- 
ness, gross  income  derived  from  the  different  classes  of  business  shall  be  as- 
certained according  to  the  definitions  abo'-e  applicable  thereto. 

The  receipts  from  sales  of  patent  rights  should  be  included  in 
making  up  a  statement  of  gross  income.  (T.  R.  March  29,  1910, 
K"o.  1606,  see  Appendix  K.) 

Sec.  65.  Income  From  Property  Constitutionally  Exempt 
From  Federal  Taxation.  —  On  January  18,  1910,  the  commis- 
sioner of  internal  revenue  issued  the  following  bulletin:  (T.  D. 
1583,  see  Appendix  E.) 

In  view  of  the  fact  that  the  tax  imposed  by  section  38  of  the  Act  of  August 
5,  1909.  is  not  upon  the  property  or  income  of  corporations,  joint  stock  com- 
panies, etc.,  but  is  a  special  excise  tax  to  be  measured  by  the  annual  net 
income  of  such  corporations,  etc.,  it  is  held,  conformably  to  the  opinion  of  the 
hoii,!rable  Attorney-General,  to  whom  the  question  has  been  submitted. 
Fed.  Corp.  Tax  —  8 


114         Federal  Corpokation  Tax  Law. 

That  in  computing  the  amount  of  the  gross  income  corporations  owning 
United  States  bonds  should  include  the  interest  received  thereon,  and  that 
such  interest  should  not  be  deducted  from  the  gross  income  for  the  purpose  of 
ascertaining  the  net  income,  which  serves  as  a  basis  for  computing  the  amount 
of  taxes  to  be  paid. 

The  opinion  of  the  Attorney-General  here  referred  to  was  given 
under  date  of  January  13,  1910,  and  reads  as  follows: 

Sir.  —  I  have  the  honor  to  acknowledge  receipt  of  your  communication  of 
December  23,  1909,  in  which  you  request  my  opinion  as  to  whether  or  not 
under  section  38  of  the  Act  of  August  5,  1909  (36  Stat.  112),  corporations 
subject  to  the  tax  provided  for  therein  should  include  in  the  returns  required 
to  be  made,  as  a  part  of  their  gross  income,  the  interest  on  United  States 
bonds  held  by  them,  and  in  reply  thereto  will  say: 

By  section  38  of  said  Act  it  is  provided:  First,  that  the  corporations 
specified  therein  "  shall  be  subject  to  pay  annually  a  special  excise  tax  with 
respect  to  the  carrying  on  or  doing  business  by  such  corporation  .  .  . 
equivalent  to  1  per  centum  upon  the  entire  net  income  over  and  above  five 
thousand  dollars  received  by  it  from  all  sources  during  such  year,  exclusive 
of  amounts  received  by  it  as  dividends  upon  stock  of  other  corporations,"  etc. ; 
second,  that  the  net  income  of  a  corporation  shall  be  ascertained  by  deducting 
from  the  gross  amount  of  the  income:  (First)  The  expenses  described;  (sec- 
ond) losses  described:  (third)  interest  paid  on  its  indebtedness,  not  exceed 
jng  the  paid-up  capital,  and  in  case  of  banking  and  trust  companies,  interest 
paid  on  deposits:  (fourth)  all  sums  paid  within  the  year  for  taxes;  and  (fifth) 
amounts  received  within  the  year  a.s  dividends  upon  the  stock  of  other  cor- 
porations subject  to  the  tax  imposed;  and  third,  that  there  shall  be  deducted 
from  tlic  not  income  of  such  corporation,  ascertained  as  provided,  the  sum  of 
five  thousand  dollars,  and  the  tax  shall  be  computed  upon  the  remainder  of 
said  net  income. 

The  tax  here  imposed  is  not  a  tax  upon  the  property  of  the  corporation,  but 
is  specifically  designated  as  "  a  special  excise  tax  with  respect  to  the  carrying 
on  or  doing  business  by  such  corporation."  That  is.  it  is  in  the  nature  of  a 
tax  imposed  upon  the  privilege  of  carrying  on  the  business;  and  the  net  in 
come,  ascertained  as  is  described,  was  adopted  by  Congress  only  as  a  basis  for 
computing  wlmt  tlic  iur.nimt  of  the  assessment  should  l)o. 

In  the  passage  of  this  act.  Congress  doubtless  had  in  mind  the  decision  of 
llic  Supreme  Court  in  the  case  of  Pollock  r.  Farmers  Loan  and  Trust  Coini)any. 
IT)?  U.  S.  429.  known  as  the  income  tax  case;  and  it  was  no  doubt  its  inten 
fioti  fi)  avnid  every  character  of  taxation  that  might  be  regarded  as  a  direct 
tax;  and,  c(inH<'r|uently,  it  carefully  avoided  imposing  a  tax  upon  the  property 
of  the  corporation,  or  upon  its  inconie.  and  fixed  and  designated  it  as  a  tax 
upon  the  carrying  on  or  doinc  of  it^  tiuHiness. 

Furthernmrc.  tin  act  is  Hpccific  in  its  terms  and  enters  into  minute  detail- 
with  ref«Tcnce  to  lif)w  tlu-  n<'t  incnnic  of  the  cfirporation,  for  the  purpose  of 
fixing  the  amount  of  (he  tax,  shall  be  computed;  and  this  particulMrity  neces- 
sarily excluded  the  intention  that  any  other  provision  can,  by  implication,  b© 
rea<l  into  I  lie  net. 


Fundamental  Basis  of  Fedekai.  Corporation  Act.     115 

1  am,  therefore,  of  the  opinion  that  in  computing  the  amount  of  the  gros? 
income,  corporations  owning  United  States  bonds  shotild  inchide  the  interest 
received  thereon,  and  that  such  interest  should  not  be  deducted  from  the  groes 
income  for  the  purpose  of  ascertaining  the  net  income  which  serves  as  a  ba<ji9 
for  computing  the  amount  of  taxes  to  be  paid. 


Sec.  66.  Income  From  Dividends  On  Stock  Held  In  Other 
Companies.  —  In  this  connection  attention  is  called  to  the  opinion 
of  the  Attorney-General  of  the  United  States,  rendered  January 
24,  1910,  in  which  he  had  occasion  to  speak  as  follows: 

Sib.  —  In  reply  to  your  communication  of  January  15,  1910,  in  which  you 
ask  my  opinion  whether  under  section  38  of  the  Act  of  August  5,  11)0!)  (.3(5 
Stat.  112),  known  as  the  "corporation  tax  law,"  in  computing  its  net  income. 
a  corporation  may  deduct  from  its  gross  income  dividends  received  by  it  from 
another  corporation  of  a  class  to  which  the  act  is  applicable,  but  which  doe.« 
not  have  a  net  income  to  exceed  $5,000,  I  have  the  honor  to  say. 

Those  parts  ot  the  Act  which  bear  upon  this  question  are  as  follows: 

"  That  every  corporation  .  .  .  shall  be  subject  to  pay  annually  a 
special  excise  tax  with  respect  to  the  carrying  on  or  doing  business  by  such 
corporation,  joint  stock  company  or  association,  or  insurance  company,  equiv- 
alent to  one  per  centum  upon  the  entire  net  income  over  and  above  five 
thousand  dollars  received  by  it  from  all  sources  during  such  year,  exclusiv« 
of  amounts  received  by  it  as  dividends  upon  stock  of  other  corporations,  joint 
stock  companies  or  associations,  or  insurance  companies,  subject  to  the  tax 
hereby  imposed:  .  .  .  Provided,  however,  that  nothing  in  this  section  con- 
tained shall  apply  to  labor,  agricultural  or  horticultural  organizations,  or  to 
fraternal  beneficiary  societies,  orders  or  associations  operating  under  the  lodge- 
system,  and  providing  for  the  payment  of  life,  sick,  accident  and  other  benefits 
to  the  members  of  such  societies,  orders  or  associations  and  dependents  of  such 
members,  nor  to  domestic  building  and  loan  associations,  organized  and  oper- 
ated exclusively  for  the  mutual  benefit  of  their  members,  nor  to  any  corpora- 
tion or  association  organized  and  operated  exclusively  for  religious,  charitable 
or  educational  purposes,  no  part  of  the  net  income  of  which  inures  to  the 
licnefit  of  any  private  stockholder  or  individual. 

"  Second.  Such  net  income  shall  be  ascertained  by  deducting  from  the 
<n<iss  iuiiount  of  the  income  of  such  corporation  .  .  .  (fifth)  all  amounts 
received  by  it  within  the  year  as  dividends  upon  stock  of  other  corporations, 
joint  stock  companies  or  associations  or  insurance  companies,  subject  to  the 
tax  hereby  imposed.     .     . 

"Third.  There  shall  be  deducted  from  the  amount  of  the  net  income  of  each 
of  such  corporations,  joint  stock  companies  or  associations,  or  insurance  com- 
panies, ascertained  as  provided  in  the  foregoing  paragraphs  of  this  section, 
the  sum  of  five  thousand  dollars,  and  said  tax  shall  be  computed  upon  the 
remainder  of  said  net  income  of  said  corporation  .  .  .  for  the  year  end- 
ing December  thirty-first,  nineteen  hundred  and  nine,  and  for  each  calendar 
rear  thereafter     .     .     ." 


116         Federal  Coeporation  Tax  Law. 

The  question  is  whether  or  not  a  corporation  whose  net  income  does  not 
exceed  $5,000,  and  which,  therefore,  pays  no  tax  under  this  statute,  is  :i 
corporation  "  subject  to  the  tax  "  thereby  imposed  within  the  meaning  of  tlie 
act. 

When  the  language  of  the  act  is  considered,  together  with  the  clear  intent 
of  those  who  drafted  its  provisions,  I  think  there  can  be  no  doubt  about  the 
answer  that  should  be  given  to  this  inquiry.  The  act  expressly  declares  that 
every  corporation  of  the  kinds  mentioned  '"  shall  be  subject  to  pay  annually  a 
special  excise  tax,"  and  then  provides  a  method  for  the  computation  of  the 
amount  to  be  paid.  Therefore,  every  one  of  such  corporations  falls  within  the 
provisions  of  the  act,  and  must  make  out  a  report  of  its  business,  as  therein 
required,  .\nd  in  every  respect  comply  with  its  terms.  It  may  turn  out  when 
the  calculation  is  made  on  the  basis  specified  that  no  tax  will  be  assessed 
against  it,  not  because  the  corporation  is  not  subject  to  the  tax,  but  because 
its  earning  capacity  is  not  sufficient  to  necessitate  its  imposition  for  that 
year,  just  as  every  male  person  within  certain  ages  may  be  subject  to  draft 
during  the  time  of  war,  yet  the  conditions  necessitating  the  draft  may  never 
arise. 

This  manifest  meaning  of  the  language  is  clearly  in  accord  with  the  legis- 
lative intent.  The  purpose  was  to  exclude  $5,000  of  a  corporation's  earnings 
from  consideration  in  estimating  the  amount  of  taxes  which  it  should  pay, 
and  further,  that  such  $5,000  should  remain  exempt  from  such  estimate 
though  it  should  pass  by  way  of  a  dividend  into  the  hands  of  other  corpora 
tions,  just  as  it  was  the  intention  that  when  any  part  of  a  corporation's  earn- 
ings had  once  entered  into  an  estimate,  as  a  result  of  which  taxes  were  im- 
posed, such  sum  should  not  again  be  considered  in  determining  the  amount  to 
be  paid  by  another  corporation. 

The  eflFect  of  the  contrary  construction  shows  that  such  must  have  been 
the  purpose  of  this  provision.  For,  suppose  a  corporation  holds  50  per  cent, 
of  tlie  capital  .stock  of  two  corporations,  one  of  whicli  has  a  not  income  of 
exactly  $5,000,  and  declares  a  dividend  of  that  amount,  wliile  the  other  has 
a  net  income  of  $5,500.  which  it  disburses  as  dividends.  According  to  the 
theory  that  the  first  of  tlicse  dividend-paying  corporations  is  not  subject  to 
this  tax,  while  the  socond  one  is,  the  corporation  lioiding  their  stock  cannot 
deduct  any  part  of  the  dividends  received  from  the  first  corporation  in  esti- 
mated its  net  income,  but  can  deduct  of  that  received  from  the  second  one, 
not  only  tlio  $250,  tlie  50  per  cent,  of  the  excess  over  the  $5,000,  which  was 
dodncted  from  tlie  gross  income  of  such  corporation,  but  also  the  $2,500,  the 
50  [XT  cent,  of  tlie  $5,000  deducted.  Tliat  is,  according  t.o  this  theory,  the 
$5,000  wliicli  must  be  (ieduct<'(l  from  a  corporation's  gross  income  cannot  bo 
deducted  in  tlie  hands  of  other  corjiorations  whicli  have  received  it  as  divi 
dends  wlwn  the  first  corporation  has  a  n<'l  income  of  $5,000  or  loss,  but  it 
can  li<"  (lodiictod  if  siidi  corporatir)n  lins  a  not  income  of  over  $5,000. 

No  such  result  was  intended  by  Congress,  and  I  am  clearly  of  the  opinion 
that  tlio  dividends  rocoivod  by  a  corporation  as  a  stockholder  of  any  other 
corfioratinn  of  a  cliaract<'r  to  wliicli  th<'  act  iijiplios  slioiild  bo  doductcd  from 
itn  gross  income,  regardless  of  the  amount  of  the  net  income  of  such  dividend- 
paying  corporation. 


Fundamental  Basis  of  Federal  Corporation  Act.     117 

Sec.  67.  Income  Received  by  a  Company  In  a  Representa- 
tive Capacity. —  It  seems  entirely  clear  from  a  careful  reading 
of  the  act  that  funds  received  by  a  company,  while  acting  in  a 
purely  representative  capacity,  are  not  to  be  included  in  estimat- 
ing the  gross  income  of  such  company. 

Sec.  68.  Income  From  Foreign  Business  and  Foreign  In- 
vestments. —  The  Federal  Corporation  Tax  Law  expressly  pro- 
vides that  in  estimating  the  tax,  the  net  income  of  the  company 
against  which,  the  tax  is  to  be  assessed  shall  be  ascertained  by 
deducting  from  the  gross  amount  of  the  income  of  such  company, 
as  the  same  shall  have  been  received  within  the  year  from  all 
sources,  the  deductions  pointed  out  in  the  act.  The  language  here 
used  in  sufficiently  broad  to  aiford  abundant  support  for  the  regu- 
lation of  the  commissioner  of  internal  revenue  (December  3, 
1909,  T.  D.  1571,  see  Appendix  C.)  to  the  effect  that  the  state- 
ment of  income  must  include  not  only  business  carried  on  within 
the  confines  of  the  United  States,  but  income  received  from  busi- 
ness transacted  in  any  foreign  country  as  well,     (See  post,  §  71.) 

Sec.  69.  Meaning  of  "Net  Income."  —  Net  income,  by  way 
of  definition,  must  follow  closely  the  meaning  already  given  to  the 
word  '  income  "  as  employed  in  the  Federal  Tax  Enactment.  It 
means  the  amount  of  income  of  the  character  already  defined 
remaining  after  certain  deductions  are  made  from  the  amount  of 
gross  income  in  the  manner  pointed  out  in  the  act.  Therein  will 
be  found  clearly  pointed  out  the  method  of  calculating  net  income 
for  the  purpose  of  levying  of  the  excise  tax.  It  will  be  perceived 
on  examination  that  the  act  makes  provision,  first,  for  ascertain- 
ing the  net  income  of  domestic  companies ;  and  second,  for  foreign 
companies. 

Sec.  70.  Manner  of  Ascertaining  Net  Income  of  Domestic 

Companies.  —  Section  2  (lines  1-28)  of  the  Federal  Corporation 

Tax  Act  provides  the  following  method  for  ascertaining  the  net 

income  of  domestic  corporations,  to  wit : 

Second.  Such  net  income  shall  be  ascertained  by  deducting  from  the  gross 
amount  of  the  income  of  such  corporation,  joint  stock  company  or  association, 


118         Federal  Cokpokation  Tax  Law. 

or  insurance  company,  received  within  the  year  from  all  sources,  (first)  all 
the  ordinary  and  necessary  expenses  actually  paid  within  the  year  out  of  in- 
come in  the  maintenance  and  operation  of  its  business  and  properties,  includ- 
ing all  charges,  such  as  rentals  or  franchise  payments  required  to  be  made  as 
a  condition  to  the  continued  use  or  possession  of  property ;  ( second )  all  losses 
actually  sustained  within  the  j'ear  and  not  compensated  by  insurance  or  other- 
wise, including  a  reasonable  allowance  for  depreciation  of  property,  if  any, 
and  in  the  case  of  insurance  companies  the  sums  other  than  dividends  paid 
within  the  year  on  policy  and  annuity  contracts  and  the  net  addition,  if  any, 
required  by  law  to  be  made  within  the  year  to  reserve  funds;  (tliird)  interest 
actually  paid  w'ithin  the  year  on  its  bonded  or  other  indebtedness  to  an 
amount  of  such  bonded  and  other  indebtedness  not  exceeding  the  paid  up  cap- 
ital stock  of  such  corporation,  joint  stock  company  or  association,  or  insur- 
ance company,  outstanding  at  the  close  of  the  year,  and  in  the  case  of  a  bank, 
banking  association  or  trust  company,  all  interest  ctually  paid  by  it  within 
the  year  for  taxes  imposed  under  the  authority  of  the  United  States  or  of 
any  State  or  Territory  thereof,  or  imposed  by  the  government  of  any  foreign 
country  as  a  condition  to  carrying  on  business  therein;  (fifth)  all  amounts  re- 
ceived by  it  within  the  year  as  dividends  upon  stock  of  other  corporations, 
joint  stock  companies  or  associations,  or  insurance  companies,  subject  to  the 
tax  hereby  imposed. 

Corporations  having  branch  or  subsidiary  companies  must  in- 
clude in  their  returns  the  income  of  all  such  companies.  (T.  D. 
March  29,  1910,  No.  1606,  see  Appendix  K.) 


Sec.  71.  Manner  of  Ascertaining  Net  Income  of  Foreign 
Companies.  —  Section  2  (lines  28-67)  of  the  Federal  Corjx>ra- 
tion  Tax  Act  provides  the  following  method  for  ascertaining  the 
net  income  of  foreign  corporations,  to  wit: 

Provided,  thai  in  the  case  of  :i  corporation,  joint  stock  company  or  associa- 
tion or  insurance  company,  organized  under  the  laws  of  a  foreign  country,  sucli 
net  income  shall  be  ascertained  by  deducting  from  the  gross  amount  of  ita 
income  as  received  witliin  tlie  year  from  business  transact«'d  and  capital  in- 
vested within  the  I'nited  States  and  any  of  its  Territories.  Alaska  and  ths 
District  of  ( 'oluinhin  :  (  First)  All  the  ordinary  and  necessary  evpenses  actually 
paid  within  the  year  out  of  earnings  in  the  maintenance  and  operation  of  its 
I'tisiiK'ss  and  property  within  the  United  States  and  its  Territories,  Alaska, 
;in(l  tlie  District  of  Coliniibiii.  iiuliKling  all  charges,  such  as  rentals,  or  fran 
oIiIpc  pavnu'iits,  r<'i|uirc(l  to  Ix-  iikhW'  as  a  condition  to  tlie  continued  use  or 
pjiSHession  of  [»ro|M'rty  ;  (secoinl)  all  losses  actually  sustain<'d  within  the  year 
in  iMisineHH  condiict<'d  by  it  within  the  United  States  or  its  T<'rritorieH.  Alaska 
<ir  the  District  of  Columbia,  not  compensated  by  insurance  or  otherwise,  in 
eluding  a  rea.sonabli-  allowano'  for  dcpre(i:it ion  of  property,  if  any,  and  in 
the  ease  of  insurance  <"omp!iMi«'S  the  snnis  otlxT  tliaii  dividends,  paid  witliin 
the   year   on    policy    and    anmiilv   contracts    and    the    net   addition,    if   any,    re- 


FUNDAMENTAI.    BaSIS    OF    FeDEKAI-    CoRPORATIOIf     AcT.        119 

<iuired  by  law  to  be  iniule  within  the  year  to  reserve  funds;  (third)  interest 
actually  paid  within  the  year  on  its  bonded  or  other  indebtedness  to  an  amount 
of  such  bonded  or  other  indebtedness,  not  exceeding  the  proporticju  of  its 
paid  up  capital  stock  outstanding  at  the  close  of  the  year  from  business  trans- 
acted and  capital  invested  within  the  United  States  and  any  of  its  Territories, 
Alaska,  and  the  District  of  Columbia,  bears  to  the  gross  amount  of  its  income 
<lerived  from  all  sources  witliin  and  without  the  United  States;  (fourth)  the 
sums  paid  by  it  within  the  year  for  taxes  imposed  under  the  authority  of  the 
United  States,  or  of  any  State  or  Territory  thereof;  (fifth)  all  amounts  re- 
ceived by  it  within  tiie  year  as  dividends  upon  stock  of  other  corporations, 
joint  stock  companies  or  associations  and  insurance  companies,  subject  to  the 
tax  hereby  imposed.  In  the  case  of  assessment  insurance  companies,  the 
actual  deposit  of  sums  with  State  or  Territorial  officers,  pursuant  to  law,  as 
additions  to  guaranty  or  reserve  funds,  shall  be  treated  as  being  payments 
required  by  law  to  reserve  funds. 


Sec.  72.  Are  the  Terms  "  Net  Income  "  and  "  Net  Profit " 
Identical  In  Meaning?  —  Under  the  arbitrary  method  prescribed 
in  tlie  Federal  Corporation  Tax  Act  for  determining  the  net 
income  of  any  company  snbject  to  the  terms  thereof,  it  may 
be  stated  with  substantial  accuracy  that  net  income  and  net 
profits  are  identical  in  meaning.  Tn  Treasury  Regulations  No. 
31  (December  3,  1909,  see  Appendix  C),  attention  is  called  to 
the  fact  "  that  gross  income  is  practically  the  same  as  gross  profits, 
the  only  difference  being  that  gross  income  is  more  inclusive,  em- 
bracing as  it  does,  not  only  gross  profits  of  the  corporation,  joint 
stock  company  and  association,  but  also  all  amounts  of  income 
received  from  other  sources.  It  is  immaterial  whether  any  item 
of  gross  income  is  evidenced  by  cash  receipts  during  the  year  or 
in  such  other  manner  as  to  entitle  it  to  proper  entry  on  the  book.^ 
of  the  corporation  from  January  1  to  December  31  for  the  year  in 
which  return  is  made."  Tt  follows  as  a  logical  conclusion  that 
if  gross  profits  are  to  be  treated  as  equivalent  to  gross  income, 
that  net  profits  are  accordingly  to  be  regarded  as  substantially 
equivalent  to  net  income. 

Sec.  73.  Are  the  Provisions  of  the  Act  as  to  the  Method  of 
Calculating  Net  Income  of  Companies  Mandatory  or  Direc- 
tory?—  To  answer  this  question  reference  must  Iw  had  to  the 
language  of  the  act  (section  2,  lines  1—30)  itself,  which  provides 
that  such  net  income  shall  bo  ascertained  in  the  particular  method 


120  Federal  Cokpoeation  Tax  Law. 

set  out  in  the  act.  The  word  '"  shall  "  as  used  in  this  immediate 
connection  has  under  well-ascertained  rules  of  statutory  construc- 
tion an  identical  meaning  with  the  word  ""  must,"  when  followed 
by  a  statement  of  a  particular  method  to  be  followed  in  ascertain- 
ing the  net  income  of  companies  subject  to  the  act  which  is  to  be 
so  construed  as  to  exclude  all  other  methods  than  the  one  set  out 
in  the  enactment  itself.  (Mason  i'.  Fearson,  9  How.  248,  13  L.  E. 
125  ;  Re  Jordan,  94  U.  S.  248  ;  Minor  v.  Mechanics  Bank,  1  Peters 
46,  7  L.  E.  47 ;  Thompson  v.  Rowe  Edem  Carroll,  22  How.  422, 
16  L.  E.  387;  Cairo  &  F.  R.  Co.  v.  Hecht,  95  U.  S.  168,  24  L.  E. 
423.) 

Sec.  74.  Statutory  List  of  Deductions  to  Be  Made  From 
Gross  Income.  —  Paragraph  2  (lines  1-67)  of  the  Federal  Cor- 
poration Tax  Law  provides  as  follows : 

Second.  Such  net  income  shall  be  ascertained  by  deducting  from  the  gross 
amount  of  the  income  of  such  corporation,  joint  stock  company  or  association, 
or  insurance  company,  received  within  the  year  from  all  soufces:  (First) 
All  tlie  ordinary  and  necessary  expenses  actually  paid  within  the  year  out  of 
income  in  the  maintenance  and  operation  of  its  business  and  properties,  in- 
cluding all  charges  such  as  rentals  or  franchise  payments,  required  to  be  madff 
as  a  condition  to  the  continued  use  or  possession  of  property;  (second)  all 
losses  actually  sustained  within  the  j'car  and  not  compensated  by  insurance 
or  otherwise,  including  a  reasonable  allowance  for  depreciation  of  property, 
if  any,  and  in  the  case  of  insurance  companies,  the  sums  other  than  dividends 
paid  within  the  year  on  policy  and  annuity  contracts  and  net  addition,  if  any, 
required  by  lav;  to  be  made  witliin  the  year  to  reserve  funds;  (third)  Interest 
actually  paid  within  the  year  on  its  bonded  or  other  iiidobtedneas  to  an 
amount  of  siioli  bonded  or  other  in<iebtednes3  not  exceeding  the  paid  up  capital 
stock  of  such  corporation,  joint  stock  company  or  association,  or  insurance 
company,  outstanding  at  tho  closo  of  the  year,  and  in  case  of  a  bank,  banking 
association  or  trust  coni])any,  all  interest  actually  paid  by  it  within  the  year 
on  deposits;  (fniirth)  all  snnis  jiniil  by  it  within  the  year  for  taxes  imposed 
under  the  autliority  of  the  United  States  or  of  any  State  or  Territory  thereof 
or  imposed  by  the  government  of  any  foreign  country  as  a  condition  to  carry- 
ing on  business  thoroin:  (fifth)  all  amounts  received  by  it  within  the  year  as 
diviiNml-  upnn  stock  of  nthrr  corporations,  joint  stock  companies  or  associa- 
tions or  insurance  conipani<'H,  subject  to  the  tax  hereby  imposed;  Provided, 
that  in  tho  case  of  a  corporation,  joint  stock  company  or  association  or  insur 
ancp  company,  firgani/cd  under  the  laws  of  a  foreign  country,  siich  net  income 
shall  be  ascertained  bv  (h'<ln(l  in"  frnm  (he  [»ross  ninount  of  its  income  re- 
ceived within  the  year  from  bu-iiK'ss  Irnnsacted  and  capital  invested  within  the 
T'nited  S'fntes,  nnd  any  of  its  Territories.  Alaska  and  the  District  of  Colum- 
bia:     (First)    All   tlie  ordinary  and   ncceHsary  expenses  actually  paid   within 


Fundamental  Basis  of  Federal  Corporation  Act.     121 

the  year  out  of  earnings  in  tiie  maintenance  and  operation  of  its  business  and 
property  vvitliin  the  United  States  and  its  Territories,  Alaska  and  the  District 
of  Columbia,  including  all  cliarges,  such  as  rentals  or  franchise  payments  re- 
quired to  be  made  as  a  condition  to  the  continued  use  or  possession  of  prop 
«rty;  (second)  all  losses  actually  sustained  witiiin  tlie  year  in  business  con- 
ducted by  it  within  the  United  States  or  its  Territories,  Alaska  or  the  Dis- 
trict of  Columbia,  not  compensated  by  insurance  or  otherwise,  including  a 
reasonable  allowance  for  depreciation  of  property,  if  any,  and  in  the  case  of 
insurance  companies  the  sums  other  tlin  dividends  paid  within  the  year  on 
policy  and  annuity  contracts  and  the  net  addition,  if  any,  required  by  law  to 
be  made  within  the  year  to  reserve  funds;  (third)  interest  actually  paid 
within  the  year  on  its  bonded  or  other  indebtedness  to  an  amount  of  such 
bonded  or  other  indebtedness,  not  exceeding  the  proportion  of  its  paid  up 
capital  stock  outstanding  at  the  close  of  the  year  which  the  gross  amount  of 
its  income  for  the  year  from  business  transacted  and  capital  invested  within 
the  United  States  and  any  of  its  Territories,  Alaska  and  the  District  of 
Columbia,  bears  to  the  gross  amount  of  its  income  derived  from  all  sources 
within  and  without  the  United  States;  (fourth)  the  sums  paid  by  it  within 
the  year  for  taxes  imposed  under  the  authority  of  the  United  States  or  of 
any  State  or  Territory  thereof;  (fifth)  all  amounts  received  by  it  within  the 
year  as  dividends  upon  stock  of  other  corporations,  joint  stock  companies  or 
associations,  and  insurance  companies,  subject  to  the  tax  hereby  imposed.  In 
the  case  of  assessment  insurance  companies  the  actual  deposit  of  sums  with 
State  or  Territorial  officers,  pursuant  to  law,  as  additions  to  guaranty  or 
reserve  funds,  shall  be  treated  as  being  payments  required  by  law  to  reserve 
funds. 

With  respect  to  deductions  the  treasury  department  in  its  bul- 
letin of  December  3,  1909  (T.  R.  No.  31,  see  Appendix  C.)  speaks 
as  follows : 

"  The  specified  deductions  actually  paid  within  the  year,  set  forth  in  the 
statute  and  as  described  in  article  3  preceding,  shall  include  all  proper  items 
of  expenses  and  charged  under  the  respective  heads  as  designated.  The  amount 
returned  for  ordinary  and  necessary  exj)enses  actually  paid  within  the  year 
out  of  income  in  maintenance  and  operation  of  the  business  and  properties 
of  the  corporation  should  not,  however,  embrace  allowances  for  depreciation 
of  fixed  property  which  are  otherwise  to  be  taken  account  of  under  the  proper 
heading  in  the  authorized  deductions,  nor  expenses  paid  within  the  year  and 
charged  to  such  allowances  for  depreciation  credited  in  the  current  year  or  in 
previous  years.  In  ascertaining  expen.ses  proper  to  be  inchided  in  the  de- 
ductions to  be  made  under  this  article,  corporations  carryinsr  materials  and 
supplies  on  hand  for  use  should  include  in  such  expenses  the  charces  for 
materials  and  supplies  only  to  the  amount  that  the  same  are  actually  dis 
bursed  and  used  in  operation  and  maintenance  during  the  year  for  which 
return  is  made. 

It  is  immaterial  whether  the  deductions  ar«  evidenced  by  actual  dishurse- 
ments  in   cash,   or  whether   evidenced   in   such  other  way   as   to  be  properly 


I'll  Federal  Corpokation  Tax  Law. 

acknowledged  by  the  corporate  officers  and  so  entered  on  the  books  as  to  con- 
stitute a  liability  against  the  assets  of  the  corporation,  joint  stock  company, 
association  or  insurance  company  making  the  return. 

The  act  further  provides  that  there  shall  be  deducted  from  the 
amount  of  the  net  income  of  each  of  the  companies  named  in  the 
act  as  being-  subject  to  the  payment  of  the  federal  corporation  tax, 
ascertained  as  prescribed  above,  the  sum  of  $5,000.  The  net  in- 
come, therefore,  is  the  remainder  of  the  gross  income  after  making 
the  foregoing  specified  deductions.  (T.  R.  December  31,  1909, 
No.  31,  see  Appendix  C.) 


Sec.  75.  Deduction  of  Expense  of  Maintenance  of  Business 
and  Properties.  —  The  act  provides  that  the  net  income  of  any 
specific  company  shall  be  ascertained  by  deducting  from  the  gross 
amount  of  the  income  of  such  company  received  within  the  year 
from  all  sources  all  the  ordinary  and  necessary  expenses  actually 
paid  within  the  year  (from  January  1  to  December  31)  out  of 
income  in  the  maintenance  of  its  business  and  properties.  The 
word  "maintenance"  as  here  used,  does  not  include  (according 
to  the  views  of  the  treasury  department,  see  Appendix  I,  sections 
62,  53)  moneys  taken  from  the  gross  income  of  the  company  in 
the  way  of  betterments  of  a  plant,  installation  of  new  fixtures  and 
machinery.  Under  the  foregoing  ruling  any  expenditures  made 
from  the  gross  income,  which  tend  to  keep  up  a  particular  plant 
to  its  normal  requirements,  as  well  as  to  enable  it  to  meet  the 
increasing  and  legitimate  demands  of  a  growing  business,  would 
not  represent  proper  deductions  as  expenses.  This,  for  the  reason 
tli;it  l)ettermcnts  are  required  as  additions  to  the  cajjital  assets 
of  tlie  company,  while  moneys  expended  in  repairs  are  regarded  as 
iK'ing  off. set  by  allowances  for  depreciation. 

Tlic  treasury  (U'partment  Ims  lidd,  liowever,  tliat  the  cost  of 
erecting  a  buihliiig  iiichidci]  in  a  Iea.se  under  wliicli  the  ])ro]wrty 
i<  held  l)v  tlic  company  is  a  j)ropcr  deduction  to  be  prorated  ac- 
cordiiiir  to  the  time  tixcd  l.v  hiw.  ( T.  K.  March  29,  No.  U)00,  see 
.VpyxMidix  I\.).  l!iit  funds  set  nsidc  by  the  (;oinpany  in  insuring 
tlicir  own  itro)K'rly  arc  not  regarded  as  a  proper  deduction,  (T. 
i:.    March  2!>,  1910,   No.   UlOO,  see  Ajjjjcndix  K.) 


FuNDAIiiENTAL    BaSIS    OF    FeDEBAI-    CORPORATION    AcT.        123 

Sec.  76.  Deduction  for   Expense  of   Operation   of   Business 

and  Properties.  —  Under  the  terms  of  the  act,  all  ordinary  and 
necessary  expenses  connected  with  the  operation  of  business  and 
property  are  a  proper  deduction.  Thus,  the  treasury  department 
holds  that  commissions  allotted  salesmen,  even  when  paid  in  stock, 
may  he  deducted  as  expense  of  operation  if  so  charged  upon  their 
books.     (T.  K.  March  29,  1910,  No.  1606,  see  Appendix  K.) 

Sec.  77.  Meaning  of  Ordinary  Expenses.  —  Only  those  ex- 
penses actually  paid  are  proper  subjects  for  taxation  (act,  para- 
graph 2,  line  5),  In  addition  to  requiring  that  the  expenses  shall 
have  been  actually  paid,  the  act  provides  that  such  expenses  must 
be  part  of  the  ordinary  and  necessary  expenses.  To  permit  of 
this  being  a  basis  for  reduction  an  expense  must  be  shovtm  to  be 
of  this  character. 

Betterments  and  repairs  are  not  proper  deductions  as  expenses, 
the  former  being  additions  to  the  capital  assets  of  the  company, 
and  the  latter  being  offset  by  allowance  for  depreciation.  (T.  R. 
March  29,  1910,  No.  1606,  see  Appendix  K.) 

Cost  of  replacing  old  rails,  structures,  etc.,  not  to  be  regarded  as 
ordinary  and  necessary  expenses.  Depreciation  during  the  year 
will  be  allowed,  however,  in  such  cases.  (T.  R.  March  29,  1910, 
No.  1606,  see  Appendix  K.) 

Dividends  paid  employees  in  lieu  of  wages  not  proper  deduction 
as  expenses.     (T.  R.  March  29,  1910,  No.  1606,  see  Appendix  K.) 


Sec.  78.  Meaning  of  Necessary  Expenses.  —  An  expense  may 
be  a  necessary  expense  and  a  proper  subject  for  deduction,  but 
under  the  statute,  not  one  of  the  ordinary  expenses  of  the  com- 
pany. Pensions  paid  or  gifts  made  to  employees  are  gratuities, 
and  not  "  ordinary  and  necessary  expenses."  (T.  R.  March  29, 
1910,  No.  1606,  see  Appendix  K.) 

Where  allowances  on  account  of  salaries  are  deemed  excessive, 
and  for  the  purpose  of  evading  the  tax  due,  investigation  will  be 
made,  and  if  the  facts  warrant,  prosecution  will  follow.  (T.  R. 
March  29,  1910,  No.  1606,  see  Appendix  K.) 


124  FjiBEKAL    COKPOKATIU.N     TaX    LaW. 

Sec.  79.  Meaning  of  Expenses  Actually  Paid  Out  of  Income. 

—  In  order  to  be  a  proper  subject  for  deduction,  the  expense  must 
be  paid  out  of  income.  In  other  words,  the  expense  must  be  paid 
from  revenue  and  not  out  of  capital  stock  account.  The  treasury 
department,  while  holding  that  sales  of  stock  and  l>onds  are  to  be 
regarded  as  sales  of  capital  assets  has,  nevertheless,  held  that  pro- 
ceeds derived  from  the  sales  of  bonds  used  in  deferring  ordinary 
and  necessary  expenses  are  a  proper  deduction  in  determining  the 
company's  net  income.  (T.  R.  March  29,  1910,  ISTo.  1606,  see 
Appendix  K.) 


Sec.  80.  What  Are  Proper  Charges  for  Rentals  or  Franchise 
Payments?  —  The  act  permits  the  inclusion  as  operating  expenses 
of  all  charges,  such  as  rentals  or  franchise  payments,  required  to 
be  made  as  a  condition  to  the  continued  use  or  possession  of  the 
property.  Such  charges  as  are  here  enumerated  would  seem  to  be 
both  ordinary  and  necessary,  and,  therefore,  the  addition  of  this 
phrase  would  seem  to  have  been  made  largely  by  way  of  definition 
rather  than  with  any  intention  of  enlarging  the  subject-matter  of 
deductions  themselves.  The  Attorney-General  has  rendered  an 
opinion  (February  21,  1910)  to  the  effect  that  mortgage  in- 
debtedness on  real  estate,  if  assumed  by  the  coqioration  acquiring 
such  real  estate  may  be  included  in  the  indebtedness  of  the  cor- 
poration, but  if  it  is  not  assumed,  and  remains  only  as  a  lien  on 
the  property,  interest  paid  thereon  may  be  deducted  as  a  charge 
made  as  a  condition  to  the  continued  use  or  possession  of  the 
property. 


Sec.  81.  Deduction  for  Losses. —  All  losses  actually  sustained 
witliin  the  year  and  not  compensated  by  insurance  or  otherwise, 
including  ;i  reasonable  allowance  for  depreciation  of  property,  if 
any,  ;ind  with  insurance  coiny>anies  tlie  vsums  other  tium  dividends 
paid  within  the  yciir  on  policy  and  annuity  contracts,  and  the  net 
additions,  if  any,  r(!(jnire(l  by  law  to  l)e  made  within  the  year  to 
reserve  funds  are  proper  deductions.  (Act,  section  2,  lines  41- 
49.) 


Fundamental  Basis  of  Federal  Corporation   Act.      125 

Sec.  82.  Meaning  of  Losses.  —  Losses  as  used  in  the  Federal 
Corporation  Tax  Act  may  be  defined  to  embrace  any  transaction 
or  things  whereby  the  assets  of  the  company  have  become  thereby 
impaired.  In  the  language  of  the  treasury  department,  "  the 
deduction  for  losses  must  be  in  respect  of  losses  actually  sustained 
during  the  year  and  not  compensated  by  insurance  or  otherwise. 
It  must  be  based  upon  the  difference  between  the  cost  value  and 
salvage  value  of  the  property  or  assets,  including  in  the  latter  value 
such  amount,  if  any,  as  has  in  the  current  or  previous  years  been 
set  aside  and  deducted  from  gross  income  by  way  of  depreciation 
as  defined  in  the  following  section  and  not  been  paid  out  in  making 
good  such  depreciation," 

It  is  immaterial  whether  the  deductions  are  evidenced  by  actual 
disbursements  in  cash  or  whether  evidenced  in  such  other  way  as 
to  he  properly  acknowledged  by  the  corporate  officers  and  so  en- 
tered on  the  books  as  to  constitute  a  liability  against  the  assets  of 
the  corporation,  etc.,  making  the  return. 

Sec.  83.  Meaning  of  Phrase  "  Losses  Actually  Sustained 
Within  the  Year."  —  The  words  "  actually  sustained  "  as  herein 
used  would  seem  to  refer  to  liquidated  liabilities  and  exclude  con- 
tingent or  possibo  liabilities.  In  addition  to  the  fact  that  the  loss 
must  be  actually  sustained,  the  act  provides  that  it  must  have  been 
sustained  within  the  tax  year  which  runs  from  January  1  to 
December  31. 

Sec.  84.  Condition  That  Losses  Must  Not  Have  Been  Coni= 
pensated  By  Insurance  or  Otherwise.  —  The  purpose  of  insert- 
ing this  particular  exception  from  the  general  enumeration  of 
deductions,  is  by  way  of  recognition  that  a  loss  not  only  covered  by 
insurance,  but  fully  compensated  by  insurance,  cannot  properly  be 
charged  as  a  loss  within  the  meaning  of  the  act.  It  is  somewhat 
difficult  to  know  just  what  is  meant  by  the  word  "  otherwise  "  as 
used  in  the  act  (Act,  paragraph  2,  lines  9-11).  The  act  reads 
^'  not  compensated  by  insurance  or  otherwise."  This  might  in- 
clude, for  example,  a  loss  caused  by  embezzlement  of  a  clerk,  or  by 
fire  caused  by  explosion  from  an  engine.     In  both  of  these  cases 


126  Federal  Corporation  Tax  Law. 

there  might  be  a  legal  liability  oii  the  part  of  some  third  person 
not  only  to  make  good  the  amount  of  the  loss  and  such  loss  might 
have  been  made  good  in  either  of  the  cases  cited.  This  undoubt- 
edly is  the  meaning  of  the  word  as  used  in  the  text  of  the  act 

Sec.  85.  Meaning  of  Reasonable  Allowance  for  Deprecia= 
tion  of  Property.  —  With  respect  to  the  character  of  the  depre- 
ciation which  has  been  made  a  subject  for  deduction,  the  treasury 
department  has  issued  the  following  bulletins : 

Depreciation.  —  The  deduction  for  depreciation  should  be  the  estimated 
amount  of  the  loss,  accrued  during  the  year  to  which  the  return  relates,  in 
the  value  of  the  property  in  respect  of  which  such  deduction  is  claimed  that 
arises  from  <'xhaustion,  wear,  and  tear,  or  obsolescence  out  of  the  uses  to 
which  the  property  is  put,  and  which  loss  has  not  been  made  good  by  pay 
ments  for  ordinary  maintenance  and  repairs  deducted  under  the  heading  of 
expenses  of  maintenance  and  operation  or  in  the  ascertainment  of  gross 
income.  Tliis  estimate  should  be  formed  upon  the  assumed  life  of  the  prop- 
erty, its  cost  value,  and  its  use.  Expenses  paid  in  any  one  year  in  making 
good  exhaustion,  wear,  and  tear,  or  obsolescence  in  respect  of  which  any  de 
duction  for  depreciation  is  claimed  must  not  be  included  in  the  deduction  for 
expenses  of  maintenance  and  operation  of  the  property  or  in  the  ascertain- 
RK'nt  of  gross  income,  but  must  be  made  out  of  accumulative  allowances 
deducted  for  depreciation  in  current  and  previous  years.  (T.  R.  Dec.  3,  1909, 
No.  31.     See  Appendix  C.) 

65.  Unearned  premiums  set  aside  by  insurance  companies  as  reserve  not 
to  be  included  as  income  until  earned. 

70.  Bad  debts,  if  so  charged  off  the  company's  books,  during  the  year,  are 
proper  deductions.  But  such  debts,  if  subsequently  collected,  must  be  treated 
as   income. 

71.  Where  increase  or  decrease  during  the  year  in  the  value  of  real  estate 
acquired  in  previous  years,  sold  or  held  for  sale,  cannot  be  accurately  deter- 
mined, stieli  increase  or  decrease  may  be  i)rorated,  as  provided  by  regulations 
in   cases  of   sab'  of  capital   assets. 

72.  Depreciation  in  value  of  mines  by  the  removal  of  ore,  if  not  otherwise 
ascertainable,  may  be  prorated  as  in  the  ease  of  sales  of  capital  assets. 

7'{.  I)<'f)reciatinii  in  \;ihi('  of  mines  liy  the  reinoval  <if  ores,  if  in  excess  of 
five  per  e«'nt.  of  invest nieiit.  (o  be  <'xplaine(l  in  return  r<'n(U'red. 

74.  Ksf  inijitcil  (|r'|(r<'cia(i<tn  in  oil  or  gas  wells,  luiildings,  ninehinerv.  etc.. 
to  Iw  stated  111  (!<'t-iil.  if  exceeding  fiv«'  per  cent,  nf  value  as  previously 
invent  nrifil. 

ITi.  ('(irjKir:it  ir)ns  leasing  minfs  nn<l  finyinr;  royalties  on  ore  mined  not  en- 
titb'd  ti)  deduction  fi>r  dejireciat  inn.  Unt  eorfjorat  ions  owning  mines  are 
entitled   to  allowatny  fi.r  (jcfireciiit i(in  bnsed  on  fair  ostimate,  etc. 

"f'l.  Hcniov.il  of  tindxT  from  timber  binds,  while  depleting  the  Innds  to  the 
ext^ent  of  Hiieli  reinov.-il.  is  ret'iirded  jis  n  ebnnge  in  the  form  uf  nssets  and  not 
a  depreciation  within  the  mcMninL'  of  the  jict. 


Fundamental  Basis  of  Federal  Corporation   Act.     127 

77.  Deductions  on  account  of  depreciation  of  property  must  be  based  on 
lifetime  of  property,  its  cost,  value,  and  use. 

78.  Voluntary  removal  of  buildings,  etc.,  for  purpose  of  improvements  not 
agarded  .as  loss  or  depreciation  and  no  deduction  therefor  should  be  made. 

79.  Depreciation  of  company's  stock  a  loss  to  the  stockholders,  not  a  loss 
to  the  company  issuing  the  same,  and  tiierefore  not  a  proper  deduction. 
(T.  R.  March  29,  1910,  No.  1606.     See  Appendix  K.) 


Sec.  86.  Deduction  By  Insurance  Companies  —  What  Are 
Permissible?  —  Two  additional  deductions  are  permitted  in  the 
case  of  insurance  companies.  The  first  of  these  is  that  which  per- 
mits sums,  other  than  dividends  paid  by  insurance  companies 
within  the  year  on  policy  and  annuity  contracts  to  be  deducted. 
The  other  is  that  which  permits  assessment  insurance  companies 
to  deduct  the  actual  deposit  of  sums  made  by  them  with  State  or 
Territorial  officers,  pursuant  to  law,  as  additions  to  guaranty  or 
reserve  funds.  These  will  now  be  taken  up  for  separate  considera- 
tion. 

Sec.  87.  Allowance  for  Sums  Paid  on  Policy  and  Annuity 
Contracts.  —  Payments  other  than  dividends,  paid  within  the 
year  on  policies  or  annuity  contracts,  may  be  deducted  by  insur- 
ance companies  in  determining  the  amount  of  their  net  income. 
Such  payments  are  to  be  treated  as  losses  or  fixed  charges  and  as 
such  are  proper  deductions. 

Sec.  88.  Allowance  for  Net  Addition  Required  by  Law  to 
Be  Made  to  Reserve  Funds.  —  The  right  is  given  insurance  com- 
panies in  ascertaining  their  net  income  to  deduct  from  their  gross 
income  among  other  items  the  amount,  if  any,  required  by  law 
to  be  made  within  the  year  to  reserve  funds.  This  has  reference 
unquestionably  to  such  additions  to  this  reserve,  as  may  be  com- 
pelled of  an  insurance  company,  by  State  officials  acting  under 
competent  statutory  authority  in  the  premises. 

Sec.  89.  Deduction  for  Indebtedness.  —  Paragraph  2,  lines 
68-75,  of  the  act  provides  as  follows:  ''  There  shall  be  deducted 
interest  actually  paid  within  the  year  on  its  bonded  or  other  in- 


128  Fedekal  Corporation  Tax   Law. 

debtedness,  to  au  amount  of  such  bonded  and  other  indebtedness, 
not  exceeding  the  paid-up  capital  stock  of  such  corporation,  joint 
stock  company  or  association  or  insurance  compan}^  outstanding 
at  the  close  of  the  year,  and  in  the  case  of  a  bank,  banking  associa- 
tion or  trust  company,  all  interest  actually  paid  by  it  within  the 
year  on  deposits."     (Act,  section  2,  lines  15-22.) 

Sec.  90.  Deduction  for  Interest  Actually  Paid  on  the  Bonded 
Indebtedness.  —  Interest  on  portions  of  bonded  or  other  indebted- 
ness bearing  different  rates  of  interest,  may  be  deducted  from 
gross  income  during  the  year,  provided  the  aggregate  amount  of 
such  indebtedness  does  not  exceed  the  paid-up  capital  stock  of  the 
corporation.      (T.  R.  March  29,  1910,  No.   1606,  see  Appendix 

Railroad  companies  operating  leased  or  purchased  lines  to  in- 
clude all  receipts  derived  therefrom,  and  if  bonded  indebtedness 
has  been  assumed,  may  deduct  interest  thereon  to  an  amount  not 
exceeding  its  paid-up  capital  stock.  If  such  subsidiary  companies 
receive  income  in  the  way  of  rentals,  etc.,  return  to  be  also  made 
by  such  companies.  (T.  R.  March  29,  1910,  No.  1606,  see 
Appendix  K.) 

Sec.  91.  Deduction  for  Interest  Actually  Paid  On  Indebted- 
ness Other  Than  Bonded.  —  Interest  paid  during  the  year  on 
notes  given  prior  to  .lanuarv  1,  1909,  to  be  prorated.  But  interest 
nil  notes  given  in  190!),  ati<l  ])ayable  subsequent  to  December, 
1909,  unless  charged  on  the  company's  Iwoks,  is  not  a  proper 
(Icductidii  fiiim  the  income  of  that  year.  (T.  R.  No.  1609,  March 
-'!»,  1!)10,  see  Appendix  K.,  paragraph  61}.) 

Sec.  92.  Limitation  Upon  the  Allowance  for  Interest  to  the 
IZffect  That  It  Must  Not  IZxceed  Paid  =  Up  Capital  Stock  of  the 
Company  Outstanding;  at  the  Close  of  the  Year.  —  The  words 

"  fMiiifiil  stock,"  as  ns('<l  in  tlic  art.  rcl'cr  uii(|U('st  ioiiably  to  the 
amount  of  tlic  antliorizoil  capital  stock  actually  jiaid  in  to  the 
trfasurv  of  tlic  companv.  rjnicr  tlic  provisions  of  the  act  all 
interest  paid  l»y  the  coinjjany  within  the  preceding  tax  year  may 


Fundamental  Basis  of  Federal  Corporation  Act.     129 

be  deducted,  provided  it  is  paid  on  an  amount  of  company  in- 
debtedness which  does  not  exceed  in  the  aggregate  the  ]>aid-up 
capital  stock  of  the  company  outstanding  at  the  close  of  such  year. 
(Paragraph  2,  lines  68-73.) 

In  computing  the  several  amounts  of  interest  to  be  deducted  to 
the  amount  of  paid-up  capital  it  would  seem  to  be  proper  to  fix  the 
same  as  of  date  December  31st  of  the  preceding  tax  year. 

An  important  question  in  this  immediate  connection  was  sub- 
mitted to  the  Attorney-General  of  the  United  States  with  respect 
to  what  allowance  should  be  made  for  interest  paid  by  corporations 
on  mortgages  on  their  real  estate.  The  opinion  of  the  Attorney- 
General  (Febniary  21,  1910)  is  here  reproduced  as  follows: 

SIR:  — I  beg  to  acknowledge  receipt  of  your  communication  of  February  4, 
1910,  in  which  you  ask  my  opinion  whether,  in  ascertaining  the  net  income  of 
a  corporation  holding  and  dealing  in  real  estate,  the  entire  interest  paid  upon 
items  of  indebtedness  secured  by  mortgages  on  such  real  estate,  should  be 
deducted  from  the  gross  income,  without  reference  to  the  amount  of  capital 
stock  of  such  company. 

This  request  is  predicated  upon  a  communication  or  brief  presented  by 
"Allied  real  estate  interests  of  the  State  of  New  York,  and  of  allied  real  estate 
interests  in  the  city  of  New  York,"  signed  by  certain  attorneys  of  the  city  of 
New  York.  I  gather  from  the  communication  that  "  allied  real  estate  in- 
terests "  is  not  intended  as  the  designation  of  any  corporation  or  joint  stock 
company,  but  is  intended  to  suggest  that  the  inquiries  propounded  in  this 
communication  are  of  c<immon  interest  to  corporations  dealing  in  real  estate 
in  the  city  and  State  of  New  York,  and  therefore  a  comprehensive  ruling  is 
requested,  which  shall  be  applicable  to  all  cases  coming  within  the  general 
inquiry  put.  As  to  this  I  might  content  myself  with  a  reference  to  the  posi- 
tion consistently  adopted  by  my  predecessors  that  opinions  should  not  be 
rendered  upon  merely  hypothetical  or  general  questions,  but  only  with  respect 
to  actual  cases  arising  in  the  administration  of  the  law  by  the  respective  de- 
partments. DTtp.  82,  355,  421;  10  Op.  50;  13  Op.  531,  568;  19  Op.  331.  How- 
ever, in  view  of  the  character  of  the  statute  under  consideration  and  the  great 
importance  to  many  interests  affected  thereby  and  to  the  fact  that  the  in- 
quiries raised  by  this  communication  may  be  dealt  with  under  two  general 
propositions,  I  deem  it  expedient  to  express  an  opinion  with  respect  thereto. 

The  so  called  Corporation  Tax  Law  (Act  of  August  5.  1909.  sec.  38)  im- 
poses a  special  excise  tax  upon  the  corporations,  joint  stock  companies,  and 
associations,  and  insurance  companies  therein  described,  to  be  measured  by 
one  per  centiim  upon  the  net  income,  which  net  income  by  the  second  para- 
graph is  to  be  ascertained  by  deducting  from  the  gross  amount  of  such  income 
received  within  the  year  from  all  sources  certain  specified  items,  among  which 
only  the  two  following  are  necessary  to  be  considered  as  bearing  on  the  present 
inquiry,  viz.: 

Fed.  Corp.  Tax  —  9 


130  Fedebal  CoRPORATioisr  Tax  Law, 

"  First.  All  the  ordinary  and  necessary  exp€nses  actually  paid  within  *Iie 
year  out  of  income  in  the  maintenance  and  operation  of  its  business  and 
properties,  including  all  charges  such  as  rentals  or  franchise  payments  re- 
quired to  be  made  as  a  condition  to  the  continued  use  or  possession  of  property. 

■■  Third.  Interest  actually  paid  within  the  year  on  its  bonded  or  other  in- 
debtedness to  an  amount  of  such  bonded  and  other  indebtedness  not  exceeding 
the  paid  up  capital  stock  of  such  corporation,  joint  stock  company,  or  asso- 
ciation, or  insurance  company  outstanding  at  the  close  of  the  year,  and  in 
the  case  of  a  bank,  banking  association,  or  trust  company  all  interest  actually 
paid  by  it  within  the  j'ear  on  deposits." 

It  is  manifest  that  with  respect  to  interest  on  "  its  "  bonded  or  other  in- 
debtedness, the  right  of  deduction  and  the  limitation  of  that  right  must  be 
found  in  the  third  paragraph  quoted  above,  and  that,  however  burdensome 
such  limitation  may  appear  to  be  to  the  particular  companies  affected  thereby, 
it  is  nevertheless  very  clearly  expressed  by  the  Act  of  Congress.  It  surely 
cannot  be  assumed  that  Congress,  having  specifically  set  a  limitation  to  the 
amount  of  interest  upon  the  indebtedness  of  a  corporation  which  may  be  de 
ductible  from  its  gross  income  in  reaching  the  measure  of  the  tax  under  this 
law,  left  the  way  open  in  the  first  clause  to  eliminate  the  limitation  imposed 
by  the  third,  so  that  if  in  any  of  the  cases  suggested  by  the  allied  real  estate 
interests,  the  indebtedness  secured  by  mortgage  upon  tlie  properties  acquired 
by  the  respective  corporations  shall  have  been  assumed  by  tliem  and  has 
thereby  become  their  indebtedness,  interest  on  such  indebtedness  can  be  de- 
ducted only  to  an  amount  not  exceeding  the  paid  up  capital  stock  of  the 
respective  corporations.  On  the  other  hand,  cases  are  suggested  in  the  com- 
municatif)n  submitted,  wliere  a  realty  corporation  takes  title  to  real  jiroperty 
subject  to  a  niortgage,  but  docs  not  assume  the  indebtedness  secured  thereby. 
Under  such  circumstanc<'S,  as  is  stated  in  the  brief,  "  such  mortgage  is  in  no 
sense  its  indebtedness;  the  'thing'  itself,  i.  c,  the  real  property,  and  not  the 
corporation,  is  liable  for  the  mortgage  and  interest  tliereon ;  but  in  order  that 
the  coriHir:i1  idii  may  maintain  or  keep  possession  of  or  not  be  ovisted  tliere- 
from,  the  interest  must  I)e  paid." 

This  would  not  be  payment  by  the  corporation  owning  the  property  subject 
to  such  lien  of  its  own  in<lebto(liioss,  because  tli<>  indel)tedness  is  not  "  its  "' 
bonded  or  other  indcljiedncss,  Imt  an  iiidrlitediK'ss  by  a  thiid  party  aiid 
charged  as  a  lion  upon  the  land  acquiied,  subject  thereto,  by  tlie  ^lurchasimr 
corporation.  The  interest  accruing  upon  such  charge  or  incumbrance  would 
certainly  f;ill  witliin  the  description  in  tlie  first  clause  of  the  second  para 
graph  nf  the  si'ctjiiTi  iiiider  cniisidciat  ion  as  one  of  the  "  cliarges  required  to 
he  made  as  a  comlition  to  the  contiimcd  use  or  possession  of  ])roperty  "  and 
therefr)re  would  I>o  deductible  as  such. 


Sec.  93.  Dctliiction  In  Case  of  Rankinj;:  Institutions  to  the 
Amount  of  Interest  Actually  Paid  By  Them  Within  the  Year 
On  Deposits. —  All  li.iiikinir  or  trnsi  iiist  iliit  idiis  may  dodnct  !i]l 
iiitorcst  !K'tnnIl\'  p;ii'l  liv  tliciii  witlnii  tlic  ycnr  (ui  dciiosits.  It 
ha.s  boon   liold   by   llii-   troa.sury  dcpartiiicnt    that    iiitorost   ]iaid  on 


Fundamental  Basis  of  Federal  Corporation  Act.     131 

time  deposits  and  deposits  subject  to  check,  constitute  proper 
deduction  from  the  amount  of  gross  income  during  the  year.  (T. 
n.  March  29,  1910,  No.  160G,  see  Appendix  K.) 

Sec.  94.  Deduction  for  Taxes.  —  Deductions  may  be  made 
tor  all  sums  paid  by  companies  within  the  year  for  taxes  imposed 
under  the  authority  of  the  United  States  or  any  State  or  Terri- 
tory thereof,  or  imposed  by  the  government  of  any  foreign  countr;^ 
as  a  condition  to  carry  on  business  therein.  Interest  or  taxes 
accruing  prior  to  the  year  for  which  return  is  made  is  not  a  proper 
deduction  from  the  gross  income  for  that  year.  (T.  R.  March  29, 
1910,  No.  1606,  see  Appendix  K.) 

Import  duties  or  taxes  if  included  in  arriving  at  cost  of  goods 
are  not  deductible  under  the  head  of  taxes  paid  during  the  year. 
(T.  R.  March  29,  1910,  No.  1606,  see  Appendix  K.) 

Sec.  95.  Meaning  of  the  Word  "Taxes"  as  Employed  In 
the  Act.  —  The  word  "  taxes,"  as  used  in  the  act,  should  un- 
(piestionably  be  given  a  very  broad  and  liberal  meaning.  That 
is,  it  should  include  all  taxes  on  real  and  personal  property,  cus- 
toms, excises,  licenses,  special  assessments,  etc.  (T.  E,  March 
29,  1910,  No.  1606,  see  Appendix  K.) 

Sec.  96.  What  Species  of  Foreign  Taxes  May  Be  Deducted. 

—  The  Federal  Corporation  Tax  Act  specifically  authorized  de- 
duction on  account  of  taxes  imposed  by  the  government  of  any 
foreign  country  as  a  condition  imposed  by  such  government  upon 
American  companies  carrying  on  business  within  its  territories. 
(Act,  paragraph  2,  lines  88-90.)  The  taxes  here  referred  to  are 
the  ordinary  license  or  occupation  taxes  imposed  by  foreign  gov- 
ernments upon  companies  doing  business  within  their  jurisdiction. 

Sec.  97.  Deductions  to  the  Amount  of  Dividends  Received 
Upon  Stock  of  All  Companies,  Subject  to  the  Payment  of  the 
Corporation  Excise  Tax.  —  The  nmounts  received  by  companies 
subject  to  the  operation  of  the   Federal   Corporation   Tax   Law 


132  Federal  Corporation  Tax  Law. 

within  the  tax  year,  as  dividends  upon  the  stock  of  other  corpora- 
tions, joint  stock  companies  or  associations,  or  insurance  com- 
panies, are  proper  subjects  of  deduction.  (Act,  paragraph  i\ 
lines  60-63.)  If  the  foregoing  provision  had  not  been  inserted 
in  the  Corporation  Tax  Law  there  would  have  been  one  inevitable 
result,  and  that  would  have  been  a  plain  case  of  double  taxation. 


Sec.  98.  Are     Deductions     Permissible     for     Dividends     on 
Shares    In    a    Company    Whose    Net    Income    Is    Less    Than 

$5,000?  —  The  answer  to  this  question  is  undoubtedly  in  the 
affirmative.  In  order  that  dividends  of  this  character  may  be  a 
proper  subject  for  deduction,  all  that  it  is  necessary  for  the  com- 
pany making  the  return  to  show,  is  that  the  same  must  have  been 
received  from  companies  belonging  to  a  class  subject  to  tlie  tax 
imposed  by  the  Federal  Corporation  Tax  Law. 


Sec.  99.  Are  Deductions  Permissible  on  Account  of  Divi- 
dends on  Shares  in  Foreign  Companies? — Under  the  ruling 
of  tlie  treasury  department  (March  21),  1910,  No.  1606,  see  Ap- 
pendix K.)  dividends  received  on  stock  of  foreign  corporations 
which  are  not  subject  to  the  operation  of  the  Federal  Corporation 
Tax  Law  do  not  constitute  a  proper  deduction. 


Sec.  100.  Foreign  Companies — Statutory  Method  of  Cal- 
culating Tax  on  Income  Thereof.  —  The  Federal  Corporation 
lax  Law  (section  1,  lines  10-26)  |)r<)vidc's  (hat  foreign  companies 
sliall  Ix'  subject  to  the  tax  prescribed  by  tlie  act  ou\y  with  res])ect 
to  the  carrying  on  or  doing  business  by  such  coiiij)any  to  an  equiva- 
lent income  of  one  jx-r  cent,  upon  the  amount  of  net  income  over 
and  above  $r),000  received  by  it  from  business  transacted  and 
ca[)ital  in\-e.-te(|  within  ihe  Fnited  Stales  and  its  Territories, 
Alaska  and  the  District  of  ('olnnd>ia  during  the  tax  year.  The 
act  further  provides  (section  2,  lines  35—63)  that  such  net  income 
shall  1m'  ascertained  hy  (h'dnct  in<r  from  the  gross  amount  of  its 
income    received    wiliiin    the    vear    from    business  transacted    ami 


FuNDAMEJSfTAL    BaSIS    OF    FeDKR^VL    CoKPOEATION    AcT,        133 

capital  invested  within  the   United  States  and  any  of  its  Terri- 
tories, Alaska  and  the  District  of  Columbia: 

First.  All  the  ordinary  and  necessary  expenses  actually  paid  within  tho 
year  out  of  earnings  in  the  maintenance  and  operation  of  its  business  and 
property  within  the  United  States  and  its  Territories,  Alaska,  and  the  Dis- 
trict of  Columbia,  including  all  charges,  such  as  rentals  or  franchise  payments 
required  to  be  made  as  a  condition  to  the  continued  use  or  possession  of  prop- 
erty; (second)  all  losses  actually  sustained  witliin  tlie  year  in  business  con- 
ducted by  it  within  the  United  States  or  its  Territories,  Alaska,  or  the  Dis- 
trict of  Columbia,  not  compensated  by  insurance  or  otherwise,  including  a 
reasonable  allowance  for  depreciation  of  property  if,  and  in  the  case  of  insur- 
ance companies  the  sums  other  tlian  dividends  paid  within  the  year  on  policy 
and  annuity  contracts  and  the  net  addition,  if  any,  required  to  be  made  within 
the  year  to  reserve  funds;  (third)  interest  actually  paid  within  the  year  or 
its  bonded  or  other  indebtedness  to  an  amount  of  such  bonded  and  other  in- 
debtedness, not  exceeding  the  proportion  of  its  paid-up  capital  stock  outstand- 
ing at  the  close  of  the  year  which  the  gross  amount  of  its  income  for  the  year 
from  business  transacted  and  capital  invested  within  the  United  States  and 
any  of  its  Territories,  Alaska,  and  the  District  of  Columbia,  bears  to  the  gross 
amount  of  its  income  derived  from  all  sources  within  and  without  the  United 
States;  (fourth)  the  sums  paid  by  it  within  the  year  for  taxes  imposed  under 
the  authority  of  the  United  States  or  any  State  or  Territory  thereof;  (fifth) 
all  amounts  received  by  it  within  the  year  as  dividends  upon  stock  of  other 
corporations,  joint  stock  companies,  or  associations,  and  insurance  companies 
subject  to  the  tax  hereby  imposed. 


Sec.  101.  How  Shall  the  Business  of  Foreign  Companies 
Transacted  Within  the  United  States  Be  Distinguished  from 
That  Transacted  in  Foreign  Countries?  —  The  answer  to  this 
question  is  destined  to  prove  one  of  the  knottiest  problems  found 
anywhere  in  the  Federal  Corporation  Tax  Law.  Much  light,  how- 
ever, may  be  found  in  this  connection  by  reference  to  the  decisions 
of  the  courts  in  States  Avhere  licenses  or  franchise  taxes  are  im- 
posed upon  foreign  corporations  solely  upon  the  capital  invested 
in  the  foreign  jurisdiction  where  such  tax  is  imposed.  The 
Federal  Corporation  Tax  Law  provides  that  the  tax  shall  be 
levied,  in  the  case  of  foreign  companies,  upon  the  business  trans- 
acted, and  the  capital  invested  within  the  United  States.  (Act, 
section  1,  lines  10-26.) 

Sec.  102.  Meaning  of  Business  Transacted  Within  the 
United    States.  —  The   phrase   "business   transacted   within   the 


131  Federal  Corporation   Tax  Law. 

United  States,"  has  unquestionably  the  same  meaning  as  similar 
phraseology  when  found  in  the  various  incorporation  acts  govern- 
ing the  taxation  of  foreign  corporations  which  transact  business 
within  the  said  State.  (See,  for  example,  People  ex  ret.  Wall  & 
Hanover  Street  Railway  Co.  v.  Miller,  181  N.  Y.  329.) 

Sec.  103.  Meaning  of  Capital  Invested  Within  the  United 
States.  —  A  corporation  may  transact  business  within  the  United 
States  and  yet  have  no  portion  of  its  capital  invested  therein.  The 
property  of  foreign  corporation  to  be  subject  to  taxation  within 
the  class  now  under  discussion  should  represent  capital  invested 
in  real  or  personal  property  and  permanently  located  in  the  United 
States.  (See  Wall  &  Hanover  St.  Realty  Co.  v.  Miller,  181  N.  Y. 
329.) 

Sec.  104.  Statutory  Enumeration  of  Deductions  from  Gross 
Income  by  Foreign  Companies.  —  The  Federal  Corporation  Tax 
Law  specifically  enumerates  the  following  deductions,  which  shall 
be  made  from  the  gross  income  of  a  foreign  company,  in  order  to 
determine  the  amount  of  net  income  upon  wliich  to  base  the  pro 
portionment  of  the  excise  tax  to  be  levied  uj>on  any  particular 
foreign  company.     These  deductions  are  as  follows: 

First.  All  the  ordinary  and  necessary  expenses  actually  paid  within  th«» 
year  out  of  carninfis  in  the  niaintonanco  and  operation  of  its  bnsim'ss  and 
property  witliiii  the  I'nitod  States  and  its  T<Tritories,  Alaska,  and  tiie  DistricI 
of  Columbia,  including  all  charges,  such  as  rentals  or  franchise  payments 
required  to  be  made  as  a  condition  to  the  continued  use  or  possession  of  prop 
erty ;  (second)  all  Ioss<>s  actually  sustained  within  tlw  year  in  business  co.i 
ducted  by  it  witliin  the  United  Stat<'s  or  its  Territories,  Alaska,  or  tlie  Di^ 
triet  of  Columbia,  not  componsateii  by  insurance  or  otherwise,  including  a 
reasonable  allowance  for  depreciation  of  property,  if  any,  ami  in  the  ease  of 
insurance  eomjianics  tlie  sums  other  tiian  dividends  paid  witliin  tlic  year  on 
policy  and  annuity  enntracts,  and  tlie  net  addition,  if  any,  rc(iuir<'d  l)y  law 
to  l)f  niadr-  witliin  th<'  y<'ar  to  reserve  funds;  tliird,  interest  actually  paid 
within  the  year  to  reserve  funds;  (third)  interest  aetnally  paid  within  the 
year  on  its  bonded  or  otlier  indebti'iincss  to  an  amount  <if  sueli  bonded  and 
otluT  indebtedness,  not  exe<'i-din^'  (lie  priiportion  of  its  paid  up  ciiiiital  stock 
outstanding  at  the  elosc  of  the  year  fnr  whicli  the  gross  amount  of  its  income 
for  the  year  from  business  transact^-d  mid  cMpitiil  invested  within  the  Pnitx-d 
States  ami  any  of  its  Territorir's,  Alask.!.  and  the  District  of  ('o!iind)ia,  Iw-ar- 
to  the  gross  amount  <if  its  income  derived  from  all  sources  within  and  withojit 


Fundamental  Basis  of  Fedkeal  Cokpobation  Act.     135 

the  United  States;  (fourth)  the  suma  paid  by  it  within  the  year  for  taxes 
imposed  under  the  autiiority  of  tlie  United  States  or  of  any  State  or  Territory 
thereof;  (fifth)  all  amounts  received  by  it  within  the  year  as  dividends  upon 
stock  of  other  corporations,  joint  stock  companies,  or  associations  and  insur- 
ance companies  subject  to  the  tax  hereby  imposed.  (Act,  section  2,  lines 
35-63.) 


Sec.  105.  What  Are  Ordinary  and  Necessary  Expenses  as 

Defined  by  the  Act?  —  The  same  remarks  that  have  already  been 
made  with  reference  to  determining  what  are  the  ordinary  and 
necessary  expenses  of  domestic  corporations  in  this  immediate 
connection  are  equally  applicable  in  determining  this  same  ques- 
tion with  respect  to  foreign  companies.  (See  ante,  sections  77, 
78.) 

Sec.  106.  What  Losses  Are  Proper  Subjects  of  Deduction? 

—  The  same  observations  which  were  made  in  this  connection  with 
reference  to  deductions  for  losses  on  the  part  of  domestic  com- 
panies are  equally  applicable  here.     (See  ante,  sections  81  to  84.) 

Sec.  107.  What  Interest  May  Lawfully  Be  Deducted  from 
Gross  Income?  —  The  same  observations  which  were  made  in 
this  connection  with  reference  to  deductions  for  interest  on  the 
part  of  domestic  companies  are  equally  applicable  here.  (See 
ante,  sections  90,  91.) 

General  expenses,  such  as  coal  ship  stores,  etc.,  of  foreign  steam- 
ship companies  to  be  prorated  as  provided  in  act  for  interest 
deductions.     (T.  R  March  29,  1910,  No.  1606,  see  Appendix  K.) 

Sec.  108.  What  Taxes  May  Properly  Be  Charged  Against 
Gross  Income.  —  The  same  observations  which  were  made  in  this 
connection  with  reference  to  deductions  for  taxes  on  the  part  of 
domestic  companies  are  equally  applicable  here.  (See  ante,  sec- 
tions 94,  95.) 

Sec.  109.  What  Dividends  May  Be  Deducted  from  Gross 
Income.  —  The  same  observations  which  were  made  in  this  con- 
nection with  reference  to  deductions  for  dividends  on  the  part  of 


136        Federal  Corpokation  Tax  Law. 

domestic  companies  are  equally  applicable  here.     (See  ante,  sec- 
tions 97  to  9y.) 

Sec.  110.  Special  Provision  for  Assessment  Insurance  Com= 
panies.  —  The  act  makes  special  provision  as  follows  in  the  case 
of  assessment  insurance  companies,  to  wit :  It  permits  of  deduc- 
tion in  such  cases  to  the  amount  of  capital  deposited  by  such  com- 
panies of  sums  deposited  with  State  or  territorial  officers  pur- 
suant to  law  as  additions  to  guaranty  or  reserve  funds  and  that  the 
same  shall  be  treated  as  being  payments  required  by  law  to  reserve 
funds.     (Act,  section  2,  lines  63-67.) 


CORKKCTION    AxNl)    REVISION    OF    ReTURN.  13, 


CHAPTER  VII. 

CORRECTION    AND    REVISION    OF    RETURN. 

Sec.  111.  Transmission  of  the  Return.  —  The  Federal  Cor- 
poration Tax  Act  provides  that  all  companies  of  the  character 
described  in  section  1  of  the  act  must,  on  or  before  the  first  day 
of  March  of  each  year,  make  a  true  and  correct  return,  under 
oath  or  affirmation  of  its  president  or  other  principal  officer,  and 
its  treasurer  or  assistant  treasurer.  This  return  must  be  trans- 
mitted by  the  company  in  whose  behalf  the  return  is  made  to  the 
collector  of  internal  revenue  for  the  revenue  district  in  v^hich  the 
company  has  its  principal  place  of  business.  (Act,  section  3, 
lines  93-95.) 

In  the  case  of  foreign  companies,  the  return  must  be  trans- 
mitted to  the  collector  of  the  internal  revenue  district  in  which  is 
situated  the  place  where  its  principal  business  is  carried  on  within 
the  United  States.  (Act,  section  3,  lines  93-95.)  The  words 
"  principal  place  of  business,"  as  used  in  this  connection,  will 
undoubtedly  be  given  a  very  broad  and  liberal  interpretation  and 
always  in  favor  of  the  company  making  the  return.  Just  so  long 
as  the  return  is  transmitted  in  good  faith,  it  matters  little  whether 
there  is  compliance  according  to  the  letter  of  the  law  in  this  regard. 
For  the  purpose  of  transmission,  the  principal  place  of  business 
of  a  domestic  company  may  be  regarded  either  as  the  place  desig- 
nated in  its  charter  as  the  domiciliary  office  of  the  company  or  it 
may  be  looked  at,  from  a  business  standpoint,  as  being  the  place 
where  its  plant  or  principal  business  operations  are  carried  on. 
In  the  case  of  foreign  corporations  reference  is  undoubtedly  had 
to  the  place  in  the  United  States  from  or  in  which  its  principal 
business  operations  therein  are  directed  or  carried  on. 

Sec.  112.  Penalty  for  Failure  to  Make  Returns.  —  All  re- 
turns must  be  made  by  June  1st  unless  the  collector,  in  ease  of 


13b  Fedeeal  Corporation  Tax  Law. 

neglect  occasioned  by  the  sickness  or  absence  of  the  othcer  au- 
thorized to  make  the  return,  or  for  other  sufficient  reason,  allows 
such  further  time  for  making  the  return  as  he  may  deem  neces- 
sary not  exceeding  thirty  days.  (Act,  paragraph  5,  lines  8  to 
16.') 

In  case  of  a  refusal  on  the  part  of  any  company  to  make  returns 
as  required  by  the  act,  the  commissioner  of  internal  revenue  is 
required  to  add  fifty  per  cent,  to  the  amount  cf  the  tax  as  assessed 
by  him.      (Act,  section  5,  lines  1-18.     See  also  section  126  post.) 


Sec.  113.  Power  of  Collectors  of  Internal  Revenue  to  Peject 
Incomplete  Returns. —  Inasmuch  as  the  duty  of  the  collector 
is  to  report  to  the  commissioner  of  internal  revenue  of  failure 
on  the  part  of  any  company  to  make  the  returns  as  required  by 
law  (Act,  section  4,  lines  1-34),  it  may  be  safely  asserted  that  by 
necessary  implication  it  is  his  duty  to  report  to  the  commissioner 
of  internal  revenue  the  fact  that  a  certain  company  has  made  in- 
complete returns.  Tn  such  a  case  the  collector  of  internal  revenue 
should  simply  transmit  the  return  as  nuide  to  the  commissioner  of 
internal  revenue  with  such  comments  thereon  as  he  tliinks  the  case 
requires.  The  law  imposes  upon  liim  no  power  to  reject  returns 
or  to  refuse  to  accept  them  from  companies,  no  matter  how  incom- 
plete. The  act  specifically  says  that  such  returns  shall,  as  received, 
be  transmitted  forthwith  by  the  collector  to  the  commissioner  of 
internal  revenue.     (Act,  section  3,  lines  93-95.) 

Sec.  114.  Power  of  Commissioner  of  Internal  Revenue  to 
Require  Corrected  Returns. —  All  returns,  whether  complete  or 
incomplete  or  false,  are  recjnircd  to  he  n't;iined  by  the  commis- 
sioner (»f  internal  revenue,  whose  duty  it  is  to  make  assessments 
thereon.  (Act,  section  5,  lines  18-38.)  The  act  further  providofl 
.'IS  fiilliiws:      (Act,  section    1,   lines   1    34.) 

I'"()iirtli.  \\  ln'iii'vcr  (■vii!<'n('<'  sliall  he  produced  Ix-fori-  tlio  ("ommiHsionor  of 
Iniornn]  |{<'v«'rnif  whifli.  in  t'lc  opinion  of  tlio  ConimiHHionor.  jnstifK'H  tho  l)olief 
flint  tlic  rcdirri  iii;iilc  liy  any  <'oi[)oralion,  joint  stopk  company,  or  annociatioo, 
or  InHiiranc*'  comjiaiiy.  iH  in<'orrfcl,  or  \vlif'n«'v<T  any  collector  sliall  report  to 
th«  CommisHioiK-r  of  IntcrnnI  Kcvcnuc  tliat  any  corporation,  joint  atock  com- 


COEEECTION    AND    REVISION    OF    ReTURN.  139 

pany,  or  association,  or  insurance  company,  has  failed  to  make  a  return  as 
required  by  law,  the  Conimiasioiier  of  Internal  Revenue  may  require  from  the 
corporation,  joint  stock  c(jmpany,  or  association,  or  insurance  company  making 
such  return,  such  further  information  with  reference  to  its  capital,  income, 
losses,  and  expenditures  as  he  may  deem  expedient;  and  the  Commissioner  of 
Internal  Revenue,  for  the  purpose  of  ascertaining  the  correctness  of  such 
return  or  for  the  purpose  of  making  a  return  where  none  has  been  made,  is 
hereby  authorized  by  any  regularly  appointed  revenue  agent  specially  desig 
nated  by  him  for  that  purpose,  to  examine  any  books  and  papers  bearing  upon 
the  matters  required  to  be  included  in  the  return  of  such  corporation,  joint 
stock  company,  or  association,  or  insurance  company,  and  to  n'tpiire  the 
attendance  of  any  officer  or  employee  of  such  corporation,  joint  stock  company, 
or  association,  or  insurance  company,  and  to  take  his  testimony  with  reference 
to  the  matter  required  by  law  to  be  included  in  such  return,  with  power  to 
administer  oaths  to  such  person  or  persons;  and  the  CJommissioner  of  Internal 
Revenue  may  also  invoke  the  aid  of  any  court  of  the  United  States  having 
jurisdiction  to  require  the  attendance  of  such  officers  or  employees  and  the 
production  of  such  books  and  papers. 

Sec.  115.  Evidence  Required  Upon  Which  to  Base  an  Order 
for  Corrected  Returns.  —  Under  either  one  of  two  existing  state 
of  facts  the  commissioner  of  internal  revenue  is  authorized  to 
compel  returns  by  any  company  coming  within  the  purview  of 
the  act.  First;  whenever  evidence  shall  be  brought  before  the  com- 
missioner of  internal  revenue  which  in  the  opinion  of  the  com- 
missioner justifies  the  belief  that  the  return  made  by  any 
corporation,  joint  stock  company  or  association,  or  insurance 
company,  is  incorrect.  Second.  Whenever  any  collector  shall 
report  to  the  commissioner  of  internal  revenue  that  any  corpora- 
tion, joint  stock  company  or  association  or  insurance  company  has 
failed  to  make  the  return  as  required  by  law. 

Under  either  of  the  foregoing  state  of  facts  the  commissioner  of 
internal  revenue  may  require  from  the  corporation,  joint  stock 
company  or  association,  or  insurance  company  making  the  said 
return  the  additional  information  set  forth  in  the  succeeding  sec- 
tion.    (Act,  section  4,  lines  1-34.) 

Sec.  116.  Power  of  Commissioner  of  Internal  Revenue  to 
Require  Additional  Information  to  Be  Furnished.  —  Under  the 
circumstances  referred  to  in  the  preceding  section,  the  commis- 
sioner of  internal  revenue  is  given  authority  to  require  from  com- 
panies making  the  return  such  further  information  as  he  may 


140  Federal  Corporation  Tax  Law. 

deem  expedient  with  reference  to  their  capital,  income,  losses,  and 
expenditures.  Upon  the  information  so  acquired  the  commis- 
sioner of  internal  revenue  may  amend  any  return  or  make  the 
return  where  none  has  been  made.     (Act,  section  4,  lines  13-31.) 

Sec.  117.  Power  of  Commissioner  of  Internal  Revenue  to 
Examine  the  Company  Books.  —  The  commissioner  of  internal 
revenue,  for  the  purpose  of  ascertaining  the  correctness  of  any 
return  made  to  him,  or  for  the  purpose  of  making  a  return  where 
none  has  been  made  is  specifically  authorized  by  any  regularly- 
appointed  agent  specially  designated  by  him  for  that  purpose,  to 
examine  any  books  and  papers  bearing  upon  the  matters  required 
to  be  included  in  the  return  of  any  corporation,  joint  stock  com- 
pany or  association,  or  insurance  company.  (Act,  section  4,  lines 
25-29.) 

Sec.  118.  Power  of  Commissioner  of  Internal  Revenue  to 
Take  Testimony.  —  The  commissioner  of  internal  revenue  is 
authorized  through  the  medium  of  any  regularly  appointed  rev- 
enue agent,  especially  apjwinted  by  him  for  that  purpose,  to  take 
testimony  of  any  officer  of  any  corporation,  joint  stock  company, 
association  or  insurance  company  subject  to  the  federal  corpora- 
tion tax,  with  reference  to  any  matter  required  by  law  to  be  in- 
cluded in  the  return  of  any  company  making  the  same,  or  required 
to  make  the  same.     (Act,  section  4,  lines  25-29.) 


Sec.  119.   Powers   of   Commissioner    in    Taking   Testimony. 

—  The  commissifmor  apjwinted  to  take  testimony  relating  to 
matters  required  to  be  set  out,  in  the  return  of  any  company  sulv 
ject  to  the  operation  of  the  Federal  Corporation  Tax  Act  is  given 
power  to  n(iiiirc  the  attenchuicc  of  any  officer  or  cniployee  of  any 
corporation,  joint  stock  company  or  association,  or  insurance  com- 
pany, subject  to  the  o|)(>ratioii  of  tlio  net,  to  t:ike  the  testimony  of 
sneh  {x^raons  with  roferenco  to  the  matters  re(|nired  liy  law  to  hv 
iiichM!e<l  in  sneh  return,  with  power  to  administer  oaths  to  such 
fK'rson  or  persons. 


Correction  and  Revision  of  Return.  141 

Sec.  120.  Attendance  of  Witnesses  Before  the  Commis- 
sioner —  How  Secured.  —  The  commissioner  of  internal  revenue 
is  given  power  to  invoke  the  aid  of  any  court  of  the  United 
States  having  jurisdiction,  to  require  the  attendance  of  such 
officers  or  employees  and  the  production  of  such  books  and  papers 
as  the  commissioner  appointed  by  him  to  take  testimony,  may 
deem  desirable  in  connection  with  the  making  of  any  return  of 
any  corporation  subject  to  the  payment  of  the  federal  corporation 
tax.  The  foregoing  provision  was  necessary  in  order  to  meet  the 
difficulty  which  would  undoubtedly  be  met  in  many  cases  by  such 
commissioners  procuring  the  attendance  of  officers  or  employees 
as  witness,  or  in  securing  access  to  the  books  and  papers  of  some 
company  in  the  absence  of  any  power  granted  to  him  to  punish 
for  contempt. 

The  act  specifically  confers  power  upon  the  Circuit  and  Dis- 
trict Courts  of  the  United  States  for  the  district  in  which  any 
person  summoned  to  appear  before  such  commissioner  to  testify, 
or  to  produce  books  shall  reside,  to  compel  such  attendance  and 
production  of  books  and  testify  by  proper  process.  (Act,  section 
8,  lines  19-24.) 

Sec.  121.  Examination  of  Company's  Books  —  How  Secured. 

—  The  books  of  any  company,  subject  to  the  operation  of  the 
Federal  Corporation  Tax  Act,  containing  entries  bearing  upon  the 
matters  required  to  be  included  in  the  return  may  be  required  to 
be  brought  before  the  special  commissioner  appointed  by  the  com- 
missioner of  internal  revenue.  (Act,  section  4,  lines  13-29.) 
Such  commissioner,  provided  he  is  a  regularly  appointed  revenue 
agent,  and  is  especially  designated  by  the  commissioner  of  internal 
revenue  for  that  purpose,  has  authority  to  examine  any  books  and 
papers  therein  upon  the  matters  required  to  be  included  in 
any  return.  (Act,  section  4,  lines  13-25.)  Such  commissioner 
would  undoubtedly  make  an  order  requiring  the  company  in 
whose  behalf  the  return  was  to  be  made  to  produce  before  him 
such  books  and  papers  as  the  commissioner  might  designate  in  the 
order.  In  case  these  books  were  not  produced,  an  application  could 
be  made  by  the  special  commission  to  the  proper  Circuit  or  Dis- 
trict Court  of  the  United  States  (Act,  section  8,  lines  19-24) 
asking  for  an  order  requiring  the  production  of  the  ]>n"lcs  wnutod. 


142  Federal  Corporation  Tax  Law. 

Sec.  122.  What  Courts  Have  Jurisdiction  to  Punish  Wit= 
nesses  for  Refusal  to  Attend  Before  Commissioners.  —  Juris- 
diction is  expressly  conferred  upon  the  Circuit  and  District 
Courts  of  the  United  States  for  the  district  in  which  the  persons 
summoned  by  a  special  commissioner  under  authority  of  the  com- 
missioner of  internal  revenue  to  appear,  testify  or  to  produce 
books  in  connection  with  the  making;  of  any  return  by  any  com- 
pany, shall  reside,  to  compel  such  attendance,  production  of  books 
with  testimony  by  proper  process.     (Act,  section  8,  lines  19-24.) 

Sec.  123.  What  Witnesses  May  Be  Compelled  to  Testify 
and  to  Produce  Books.  —  The  act  apparently  limits  the  right  to 
compel  the  attendance  of  witnesses  and  the  production  of  books 
before  the  commissioner  to  officers  or  employees  of  any  company 
required  by  law^  to  make  a  return  to  the  commissioner  of  internal 
revenue,  under  the  provisions  of  tlie  Federal  Corporation  Tax 
Law.  (Act,  section  4,  lines  20-29.)  There  seems  to  be  no 
authority  for  requiring  the  testimony  of  any  person  before  a  com- 
missioner who  either  was  not  an  officer  or  employee  of  such  com- 
pany at  the  time,  or  who  had  not  been  such  officer  or  employee  at 
some  previous  time  with  respect  to  the  production  of  books.  It 
would  appear  that  the  same  rules  should  he  applied  as  are  appli- 
cable in  the  case  of  the  issuance  of  a  suhpama  duces  tecum,  to 
officers  or  employees  of  corporation.  That  is,  tlwit  llic  orch'v  in 
such  cases  should  1)0  directed  to  the  ])nrticul;u'  officer  who  has  tlic 
custody  and  control  of  the  jjooks  and  ddcnments  which  it  is  desired 
to  examine.  It  it  is  not  known  what  jiarticular  officiM-  has  such 
custodv  or  control  it  would  nndonhtcdly  Ih'  sniHcicnt  for  the  order 
to  issue  against  the  cxccutiNc  head  or  managing  officer  of  the  com- 
])any,  wlio  would  Ik*  cotn|)('ll('(l  to  ('onij)ly  with  such  order,  pro- 
viding tlic  lw)oks  and  docniucnts  wanted  were  within  the  jurisdic- 
tion of  the  court  issuing  such  an  order,  at  Uie  time  the  same  was 
made. 

Sec.  124.  Power  of  Commissioner  of  Internal  Revenue  to 
Make,  Amend  or  Correct  Returns  Upon  Hvidence  Taken  Under 
His  Direction.  —  Sjx'cific  autlioritv  is  conferred  upon  the  com- 
missifitHT  "f  iiitiTiial   rc\('iiu(\  upon   information  accpiirrd  by  liini 


Correction  and  Rkvision  ok  Rkturiv.  143 

in  the  manner  i)rescnb€d  in  tlic  act  (Act,  section  4,  lines  29-31) 
to  amend  any  return  or  to  make  a  return  where  none  has  been 
made.     (Act,  section  4,  lines  29-81.) 

Sec.  125.  Statutory  Limitation  of  Time  for  the  Correction 

of  Returns.  —  Section   5  of  the  Federal   Corporation   Tax  Law 

(lines  24-38)  provides  as  follows: 

In  the  case  of  any  company  refusing  or  neglecting  to  make  the  return  to 
the  Commissioner  of  Internal  Revenue  required  by  law,  as  well  as  in  the  case 
of  false  or  fraudulent  returns,  the  Commissioner  of  Internal  Revenue  shall, 
upon  the  discovery  thereof,  at  any  time  within  three  years  after  such  return 
is  due,  make  a  return  upon  information  obtained  in  the  manner  prescribed 
by  the  act. 

Sec.  126.  Penalties  for  Erroneous  or  False  and  Fraudulent 
Returns.  —  If  any  company  subject  to  the  operation  of  the 
Federal  Corporation  Tax  Act  shall  render  a  false  or  fraudulent 
return,  it  is  liable  to  a  penalty  of  not  less  than  one  thousand  dol- 
lars and  not  exceeding  ten  thousand  dollars.  (Act,  paragraph  8, 
lines  1-14.)  Any  person,  authorized  by  law  to  make,  render, 
sign,  or  verify  any  return  who  make  any  false  or  fraudulent  re- 
turn or  statement  with  intent  to  defeat  or  evade  the  assessment 
required  by  the  act  to  be  made,  shall  be  guilty  of  a  misdemeanor, 
and  shall  be  fined  not  exceeding  one  thousand  dollars,  or  be  im- 
prisoned not  exceeding  one  year  or  both  at  the  discretion  of  the 
■court  with  the  costs  of  prosecution.     (Act,  section  8,  lines  8-14.) 

In  addition  to  the  foregoing  it  is  provided  that  the  commis- 
sioner of  internal  revenue  shall  in  the  case  of  any  return  being 
made  to  him  with  false  or  fraudulent  intent,  add  one  hundred 
per  cent,  to  the  amount  of  the  tax  as  the  same  would  be  assessed 
by  him  in  a  truthful  and  correct  manner.  (Act,  section  5,  lines 
1-4.) 

Sec.  127.  Are  the  Returns  Public  Records?  —  The  act  pro- 
vides that  when  the  assessment  shall  be  made  as  provided  therein, 
the  returns,  together  with  any  corrections  thereof,  have  been  made 
by  the  commissioner,  shall  be  filed  in  the  office  of  the  commissioner 
of  internal  revenue,  and  shall  constitute  public  records,  and  are 
open  to  inspection  as  such.     (Act,  section  6,  lines  1-5.) 


t 

14-i  Federal  Corporation  Tax  Law. 

The  returns,  however,  are  subject  to  inspection  only  upon  com- 
pliance with  rules  and  regulations  prescribed  by  the  Secretary  of 
the  Treasury  and  approved  by  the  President.  (See  T.  D.  1665, 
November  28,  1910,  Appendix  X.)  The  regulation  governing  the 
returns  of  corporations  are  set  forth  in  Treasury  Department  No. 
1665,  bearing  date  November  28,  1910,  and  read  as  follows: 

(Regulations  Governing  the  Inspection  of  Returns  of  Corporations  Made  ia 
Accordance  with  Section  38  of  the  Tariff  Act  of  August  5,  1909.) 

Teeasurt  Department, 
Washington,  D.  C,  November  25,  1910. 

Inspection  of  Returns. 

By  section  38  of  the  Tariff  Act  of  August  5,  1909,  Congress  imposed  a  special 
excise  tax  upon  all  corporations,  joint  stock  companies,  and  associations,  and 
insurance  companies,  foreign  and  domestic,  with  certain  exceptions,  engaged 
in  business  in  the  United  States,  with  respect  to  carrying  on  or  doing  such 
business,  and  prescribed  the  method  of  handling  the  return  of  each  corporation 
as  follows: 

"  6.  When  the  assessment  shall  be  made,  as  provided  in  this  section,  the 
returns,  together  with  any  correction  thereof  which  may  have  been  made  bv 
the  Commissioner,  shall  be  filed  in  the  office  of  the  Commissioner  of  Internal 
Revenue  and  shall  constitute  public  records  and  be  open  to  inspection  as  such." 

In  the  act  making  appropriations  for  the  legislative,  executive,  and  judicial 
departments  of  the  government  for  the  fiscal  year  ending  June  30,  1911,  there 
appears  this   language: 

"  For  classifying,  indexing,  exhibiting,  and  properly  caring  for  the  returnn 
of  all  corporations,  required  by  section  thirty-eight  of  an  act  entitled  "An  Act 
to  provide  revenue,  equalize  duties,  encourage  the  industries  of  the  United 
States,  and  for  other  purpdses."  approved  August  fiftli,  nineteen  hundred  and 
nin<',  including  the  employmont,  in  the  District  of  Columbia,  of  such  clerical 
and  other  personal  services  and  for  rent  of  such  quart<>rs  as  may  be  necessary, 
twenty-five  thousand  dollars;  Provided,  That  any  and  all  such  returns  shall 
Ik"  open  to  inspection  only  upon  the  order  of  the  President,  under  rules  and 
regulations  to  be  prescribed  by  the  Secretary  of  the  Treasury  and  approved 
by  the  President." 

For  the  purpose  of  making  effective  tlie  legislative  intent  thus  expressed, 
tlie  President  hiiH  ordered  that  all  sucli  returns  shall  be  open  to  inspection 
under   till-   following  rules  and   regulations: 

1.  rill-  return  of  every  corporation  shall  1m>  open  to  the  inspection  of  the 
proper  ollieers  ami  employees  of  the  Treasury  IVpartment.  \\'^ere  access  to 
any  return  is  desin'd  by  an  officer  or  employee  of  any  other  department  of  the 
(lovernment.  an  at)j)lication  for  permission  to  inspect  such  return,  setting  out 
the  rensons  therefor,  shall  be  made  in  writing,  signed  by  the  head  of  the  ex- 
ecutive department  or  oilier  government  establishment  in  which  such  officer  or 
emjiloyee  is  einployrd.  and  transmitted  to  the  Secretary  of  the  Treasury.  If. 
however,  the  retur?i  is  desired  to  tie  iisrwl  in  any  lejral  proceedings,  or  to  bf» 
used   in  any  manner  by  which  any  information  contained   in   the  return  could 


COREECTION   AND   REVISION    OF    ReTUBN.  145 

be  made  public,  or  access  to  any  return  is  desired  by  any  oflficial  of  any  State 
or  Territory  of  the  United  States,  the  application  for  permission  to  inspect 
8uch  return  shall  be  referred  to  the  attorney  general,  and  if  recommended  by 
him,  transmitted  to  the  Secretary  of  the  Treasury. 

2.  The  Secretary  of  the  Treasury,  at  his  discretion,  upon  application  to  him 
made,  setting  forth  what  constitutes  a  proper  showing  of  cause,  may  permit 
inspection  of  the  return  of  any  corporation  by  any  bona  fide  stockholder  in 
such  corporation.  The  person  desiring  to  inspect  such  return  shall  make 
application,  in  writing,  to  the  Secretary  of  the  Treasury,  setting  forth  th  i 
reasons  why  he  should  be  permitted  to  make  such  inspection,  and  shall  attach 
to  his  application  a  certificate  signed  by  the  president,  or  other  principal 
officer  of  such  corporation,  countersigned  by  the  secretary,  under  the  corporate 
seal  of  the  company,  that  he  is  a  bona  fide  stockholder  in  said  company 
(Where  this  certificate  cannot  be  secured,  other  evidence  will  be  considered 
by  the  Secretary  of  the  Treasury  to  determine  the  fact  whether  or  not  the 
applicant  is  a  bona  fide  stockholder  and  therefore  entitled  to  inspect  the  return 
made  by  such  company.)  The  privilege  of  inspecting  the  return  of  any  cor- 
poration is  personal  to  the  stockholders,  and  the  permission  granted  by  the 
Secretary  to  a  stockholder  to  make  such  inspection  cannot  be  delegated  to  any 
other  person. 

3.  The  returns  of  the  following  corporations  shall  be  open  to  the  inspection 
of  any  person  upon  written  application  to  the  Secretary  of  the  Treasury, 
which  application  shall  set  forth  briefly  and  succinctly  all  facts  necessary  to 
enable  the  Secretary  to  act  upon  the  request: 

(a)  The  returns  of  all  companies  whose  stock  is  listed  upon  any  duly  organ- 
ized and  recognized  stock  exchange  within  the  United  States,  for  the  purpos^j 
of  having  its  shares  dealt  in  by  the  public  generally. 

(&)  All  corporations  whose  stock  is  advertised  in  the  press  or  offered  to 
the  public  by  the  corporation  itself  for  sale.  In  case  of  doubts  as  to  whether 
any  company  falls  within  the  classification  above,  the  person  desiring  to  see 
such  return  should  make  application,  supported  by  advertisements,  prospectus, 
or  such  other  evidence  as  he  may  deem  proper  to  establish  the  fact  that  the 
stock  of  such  corporation  is  oft'ered  for  general  public  sale. 

Returns  can  be  seen  only  in  the  office  of  the  Commissioner  of  Internal  Rev- 
enue, in  Washington,  D.  C.  In  no  case  shall  any  collector,  or  any  other 
internal  revenue  officer  outside  of  the  Treasury  Department  in  Washington 
permit  to  be  seen  any  return  or  furnish  any  information  whatsoever  relative 
to  any  return  or  any  information  secured  by  him  in  his  official  capacity 
relating  to  such  return. 

No  provision  is  made  in  the  law  for  furnishing  a  copy  of  any  return  to  any 
person,  and  no  copy  of  any  return  will  be  furnished  except  to  the  corporation 
making  the  return,  or  its  duly  constituted  attorney. 

The  provisions  herein  contained  shall  be  effective  on  and  after  the  25th  day 
of  November,   1910. 

Franklin  ilAcVEAon, 

Secretary  of  the  Treasury. 

Approved : 

Wm.  H.  Tafi', 

The  White  House,  November  25,  1910. 

Fed.  Cobp.  Tax  —  10 


146  Fedkral  Corporation  Tax  Law. 

Sec.  128.  Statutory  Protection  Against  Disclosures  of  Con- 
tents of  Returns.  —  Section  7  (lines  1-12)  provides  as  follows, 
with  reference  to  disclosures  of  contents  of  returns,  to  wit : 

It  shall  be  unl.iwful  for  any  collector,  deputy  collector,  agent,  clerk,  or  other 
officer  or  cnijjloyee  of  tlie  United  States  to  divulge  or  make  known  in  any 
manner  whatever  not  provided  by  law  to  any  person  any  information  obtained 
by  him  in  the  .lischarge  of  his  official  duty,  or  to  divulge  or  make  known  in 
any  manner  not  provided  by  law  any  document  received,  evidence  taken,  or 
report  made  under  this  section,  except  upon  the  special  direction  of  the  Presi- 
1ent;  and  any  oflfense  against  tht  foregoing  provision  shall  be  a  misdemeanor 
ind  be  punished  by  a  tine  not  exceeding  one  thousand  dollars,  or  by  imprison- 
ment not  exceeding  one  year,  or  both,  at  the  discretion  of  the  court. 

In  this  connection  attention  is  called  to  Treasury  Department 
Regulation  dated  February  17,  1910  (No.  594,  see  Api^endix  H.), 
which  has  exclusive  reference  to  this  so-called  publicity  clause 
of  the  Federal  Corporation  Tax  Act.  The  foregoing  regulation 
reads  as  follows : 

Many  commimications  have  been  received  at  this  office  making  inquiry  as 
to  how  the  returns  of  corporations,  joint  stock  companies,  associations,  and 
insurance  companies,  made  as  required  under  the  provisions  of  the  Corporation 
Excise  Tax  Law  (section  38  of  the  Tariff  Act  of  August  5,  1909)  were  to  be 
handled  in  the  office  of  the  Commissioner  of  Internal  Revenue,  and  whether 
or  not  they  were  to  be  open  to  general  inspection. 

The    law,   paragraph   H.  on   this   subject,    is   as   follows: 

"6.  When  the  assessment  shall  be  made,  as  provided  in  this  section,  the 
returns,  together  with  any  corrections  thereof  which  may  have  been  made  by 
the  Commissioner,  shall  be  filed  in  the  office  of  the  Commissioner  of  Infernal 
Revenue,  and  shall  constitute  the  public  records  and  be  open  to  inspection  a.s 
such." 

Congress  appropriated  .$10,000  to  carry  into  effect  the  provisions  of  the  law. 
Under  general  statutes  no  portion  of  this  appropriation  is  available  for  U9# 
in  the  District  of  Columbia.  The  returns  cannot  be  open  to  general  inspection 
in  tlie  District  of  Columbia  witliout  the  exiM'nditure  of  a  substantial  s\im  ^f 
money,  if.  th<ief(>n'.  it  was  the  iiifciit  of  Congress  to  make  these  returns 
ofw'n  to  gj'ueral  inspeetion,  it  will  Ix'  necessary  for  it  to  appropriate  a  sum 
sufficient  to  cover  the  neeessary  expenses.  Cntil  this  is  done  this  bureau  rulei 
that  the  return-;  niiuh-  und<T  this  law  are  to  be  liandled  just  as  returns  madi 
under   other    internal    revr-nue   statutes. 

Any  person,  tlierefore,  other  than  the  taxpayer  making  the  return,  or  his 
duly  afipointed  agent  or  attorney,  who  desires  to  see  sucli  return  sliall  make 
written  a|(plicat io!i  to  Ihe  Secretary  of  the  Tn-asury.  who,  in  his  iliscretioii, 
will,  n|i'iii  a  proper  show  ini.'  nf  cause  apt)r()ve  such  r<'iniest.  A  request  tlius 
approv<M|  Hhould  then  be  presented  to  the  Commissioner  of  Internal  Revenue, 
who  will  thereuy)on  j)ermit  the  return  in  niieslion  to  be  sivn  by  tlie  applicnni 
oti  such  eonditi  'HM  ns  tlw  S<'cretary  of  the  Treasury  sliall  have  imposed.  (Soc, 
however,  s<'<l  ion   127,  mitc.) 


Assessment  of  the  Federal  Corporation  Tax.       147 


CHAPTER  VIII. 

ASSESSMENT  OF  THE  FEDERAL  CORPORATION  TAX. 

Sec.  129.  Assessment    and    General    Remarks    Thereon.  — 

I^pon  the  receipt  of  the  returns  rendered,  the  tax,  as  ascertained 
to  be  due,  must  be  assessed  at  the  rate  of  one  per  centum  upon  the 
net  income  of  the  company  making  the  return,  over  and  above 
$5,000  received  by  it.  As  soon  as  the  return  is  made  by  any  com- 
pany a  record  thereof  is  made  by  the  collector  to  whom  the  return 
is  transmitted,  stating  the  name  of  the  company  making  the  re- 
turn, the  nature  of  the  principal  business  transacted,  the  location 
of  the  principal  place  of  business  with  the  net  income  reported  and 
the  date  on  which  such  return  was  received.  For  this  purpose  a 
form  is  furnished  by  the  commissioner  of  internal  revenue  (Form 
632,  see  Treasury  Department  Eegulation,  December  3,  1909,  see 
Appendix  C). 

Under  the  regulations  of  the  treasury  department  collectors  are 
instructed  whenever  it  appears  to  them  advisable  to  do  so,  to 
request  that  a  revenue  agent  be  especially  designated  to  collect 
and  furnish  to  the  commissioner  of  internal  revenue  such  ad- 
ditional data  as  in  his  judgment  is  necessary  to  determine  the 
actual  amount  of  tax  to  be  assessed  against  any  company  which, 
under  the  law,  is  required  to  make  a  return.  (Internal  Revenue 
Regulation,  December  3,  1909,  see  Appendix  C.) 

Collectors  of  internal  revenue  are  further  instructed  to  make 
a  careful  canvass  of  their  districts  to  ascertain  whether  all  returns 
due  have  been  received  from  companies  subject  to  the  tax  imposed 
by  the  Federal  Corporation  Tax  Law  (December  3,  1909,  see 
Appendix  C). 

Sec.  130.  Powers  of  Commissioner  In  Making  Assessment. 

—  Leaving  out  of  consideration  the  power  of  the  commissioner  of 
internal  revenue  to  require  the  making  of  a  correct  return,  his 


1-1:8  Federal  Corporation  Tax  Law. 

duties  with  respect  to  making  an  assessment  are  purely  ministerial 
and  are  not  in  any  sense  judicial.  All  that  remains  for  him  to  do 
is  to  make  the  necessary  mathematical  calculation  to  determine  the 
amount  of  the  tax  assessed  on  the  basis  of  one  per  centum  of  the 
total  net  income  less  tlie  $5,000  net  income  allowed  to  each  com- 
pany free  from  taxation. 

Sec.  131.  Statutory  Definition  of  Amount  of  Assessment. — 

If  a  correct  return  is  made  on  or  before  March  1st  of  each  tax 
year  then  the  assessment  is  made  on  the  basis  of  one  per  cent,  on 
the  net  income  as  ascertained  from  the  returns,  excluding  the 
$5,000  income  allowed  to  all  companies  free  from  taxation.  (Act, 
section  1,  lines  13-15.)  However,  in  case  any  company  has  failed 
or  neglected  to  make  the  return,  or  to  have  the  same  verified  by 
the  proper  officers,  thus  necessitating  the  making  up  of  a  return 
by  the  commissioner  of  internal  revenue,  the  latter  then  directs 
that  fifty  per  centum  is  to  be  added  to  the  amount  of  the  tax. 
(Act,  section  5,  lines  1-6.)  In  case  of  a  return  made  with  false 
or  fraudulent  intent,  the  act  provides  that  one  hundred  per  centum 
is  to  be  added  to  the  amount  of  the  assessment,  making  the  same 
two  per  centum  of  all  net  income  in  excess  of  $5,000. 

Sec.  132.  Time  Within  Which  Assessment  Must  Be  Made. — 

The  act  provides  tiiat  all  assessments  shall  he  inado  before  June 
1st  (Act,  section  5,  lines  18-24),  and  in  case  of  neglect  occa- 
sioned by  the  sickness  or  absence  of  any  officer  of  any  company 
required  to  make  tlio  return,  or  for  other  sufficient  reason,  the 
collector  may  allow  such  fnithci-  time  (sul)sequent  to  March  lat 
of  the  tax  year)  for  luakinii  and  dcliNcring  snch  return  to  him, 
as  h(!  may  deem  Tiecessarv,  7iot  ('\('('C(liii<;-  thirty  days. 

Returns  ina\  Ik-  made  nndci-  the  ininiediate  direction  of  the 
eoininissioncr  of  inlci'iial  rcNciinc,  an<l  assessments  nniy  he  ninde 
by  him  tli(>r('on  at  any  time  within  three  years  after  such  return  is 
due.     (Act,  section  5,  lines  24—38.) 

Sec.  133.  Notice  of  Assessment.  —  Tlic  act,  by  implication  at 
lea.st,  seems  to  rc(|nirc  that   notice  be  given  to  the  (roinpanics  as- 


Assessment  of  the  Federal  Corporation  Tax.       149 

sessed.  (Act,  section  5,  lines  32-34.)  Under  the  Treasury  Regu- 
lations (December  3,  1909,  see  Appendix  C.)  collectors  of  internal 
revenue  of  each  district  are  required  to  give  notice  of  assessment 
and  subsequent  demand  under  the  forms  prescribed  by  the  com- 
missioner of  internal  revenue.     (Forms  17,  21.) 

Section  3184  of  the  United  States  Kevised  Statutes  provides  as 
follows,  to  wit : 

Where  it  is  not  otherwise  provided,  the  collector  shall,  in  person  or  by 
deputy,  within  ten  days  after  receiving  any  list  of  taxes  from  the  Commis- 
sioner of  Internal  Revenue,  give  notice  to  each  person,  in  writing,  to  pay  any 
tax  stated  therein  to  be  left  at  his  dwelling  or  usual  place  of  business,  or  to 
be  sent  by  mail,  stating  the  amount  of  such  tax  and  demanding  payment 
thereof.  If  such  persou  does  not  pay  the  tax  within  ten  days  after  the  service 
or  sending  by  mail  of  such  notice,  it  shall  be  the  duty  of  the  collector  or  his 
deputy  to  collect  the  said  taxes,  and  the  penalty  of  five  per  centum  additional 
upon  the  amount  of  taxes  and  interest  at  the  rate  of  one  per  centum  per 
month. 


Sec.  134.  When  Assessment  Becomes  Due  and   Payable. — 

The  assessment  becomes  due  and  payable  at  any  time  on  or  before 
June  30th  of  each  tax  year.  (Act,  section  5,  lines  32-38.)  The 
only  exception  defined  in  the  act  is  in  those  cases  of  refusal  or 
neglect  to  make  the  return,  and  also  in  cases  of  false  or  fraudulent 
returns,     (Act,  section  5,  lines  24-38.) 

To  any  sum  or  sums  due  and  unpaid  after  the  30th  day  of 
June  in  each  year,  and  for  ten  days  after  notice  and  demand 
thereof  by  the  collector,  there  shall  be  added  the  sum  of  five  per 
centum  on  the  amount  of  taxes  paid  and  interest  at  the  rate  of  one 
per  centum  per  month  upon  such  tax  from  the  time  the  same 
becomes  due.     (Act,  section  5,  lines  33-38.) 

Sec.  135.  Legal  Effect  of  Making  Payments  of  Assessments 
Under  Protest.  —  Wherever  any  company  upon  whom  a  tax  is 
sought  to  be  imposed  is  desirous  of  disputing  either  the  amount  or 
the  validity  of  the  tax,  it  should  pay  the  amount  of  the  assessment 
under  protest.  This  for  the  reason  that  by  making  the  payment 
in  this  manner  it  lays  the  proper  foundation  for  the  bringing  of 
an  action  of  assumpsit  against  the  collector  receivins:  the  tax,  to 
recover  the  amount  so  paid,  for  money  paid  to  the  government 


150  Federal  Corpokation  Tax  Law. 

without  protest  cannot  be  recovered  back  again  in  the  absence  of 
statutory  provision  therefor.  Elliott  r.  Swarthout,  10  Peters  137 ; 
Wright  r.  Blakslee,  171  U.  S.  174. 

Attention  is  called  here  to  the  language  of  the  United  States 
Supreme  Court  in  Cheeseborough  v.  United  States,  192  U.  S.  253, 
48  L.  E.  432,  where  the  court  spoke  as  follows : 

The  rule  is  firmly  established  that  taxes  voluntarily  paid  cannot  be  recov 
ered  back,  and  payments  with  knowledge  and  without  compulsion  are  volun- 
tary. At  the  same  time  when  taxes  are  paid  under  protest  that  they  are  being 
illegally  exacted,  or  with  notice  that  the  payor  contends  that  they  are  illegal, 
and  intends  to  institute  suit  to  compel  their  repayment,  a  recovery  in  such  a 
suit  may  on  occasion  be  had,  altliough  generally  speaking  even  a  protest  or 
notice  will  not  avail  if  the  payment  be  made  voluntarily,  with  full  knowledge 
of  all  the  circumstances,  and  without  any  coercion  by  the  actual  or  threatened 
exercise  of  power  possessed,  or  supposed  to  be  possessed,  by  the  party  exacting 
or  receiving  the  payment,  over  the  person  or  property  of  the  party  making 
the  payment,  from  which  the  latter  has  no  means  of  immediate  relief  than  such 
payment. 

*  *  *  In  Union  Pac.  R.  Co.  v.  Dodge  County,  Mr.  Chief  Justice  Waite, 
speaking  for  tlie  court,  said :  "  There  are,  no  doubt,  cases  to  be  found  in 
which  the  language  of  the  court,  if  separated  from  the  facts  of  the  particular 
case  under  consideration  would  seem  to  imply  that  a  protest  alone  was  sufii 
cient  to  show  that  the  payment  was  not  voluntary;  but  on  examination  it 
will  be  found  tliat  the  protest  was  used  to  give  effect  to  the  other  attending 
circumstances.  Tiiua  in  p:iliott  r.  Swartout,  10  Pet.  1.37,  9  L.  Ed.  .373,  and 
Bend  v.  Hoyt,  1.3  Pet.  266,  10  L.  Ed.  1.55,  which  were  customs  cases,  the  pay 
roents  were  made  to  release  goods  held  for  duties  on  imports,  and  the  protests 
l>ecam<'  n<'cessary  in  order  to  show  that  the  legality  of  the  demand  was  not 
admitted  when  the  payment  was  made.  The  recovery  rested  upon  the  fact 
that  the  payment  was  made  to  release  property  from  detention,  and  the  pro 
test  saved  the  rights  which  grew  out  of  that  fact.  In  i'hiladelphia  r.  The 
(Collector,  r*  Wall.  7.30.  18  I.,  ed.  276,  which  were  internal  revenue  tax  cases, 
the  actions  were  sustained  "  upon  the  ground  that  the  special  provisions  in 
the  internal  revenue  acta  referred  to  warranted  the  conclusion  as  a  necessary 
implication  tliiil  ('iiiiijress  intended  to  give  the  taxpayer  such  remedy."  It 
ifl  so  expressly  stated  in  the  last  case,  p.  14,  T..  Ed.  276.  As  the  case  of 
Erskine  v.  Van  Arsdale,  \f}  Wall.  7.'),  21  L.  Ed.  63.  followed  these,  and  was  of 
the  same  general  rharneter.  it  is  to  be  presumed  that  it  was  put  uj)<)n  the  same 
f^ound.  In  such  e!is<'s  tlie  protest  phiyn  (he  same  part  as  it  does  in  customs 
casPH  and  gives  notice  that  the  payment  is  not  to  he  considered  as  admittine 
thi-  riglit    to  ni.ike  the  d'-mand. 

The  wtampH  in  (|iie-!<i'iii  were  purehasi'd  from  the  Collector  of  Internal  Rev- 
enue fnr  the  S<T()nd  Districf  nf  \ew  York,  for  tlir  purpose  of  afTixing  them  to 
a  rleed  of  conveyance  (n  tli<'  l)uildinir  company,  but  the  collector  was  not  in- 
formed nl  the  time  of  1  he  [nirehase  of  the  particular  purpose,  and  no  intima- 
tinn  w;iH  trivr-n  him.  written  or  or.-il.  (hut  jietitinner  cl.ninied  that  the  law 
re<|iiiiiTig    ^neh    stiim|)s    was    unconstitutional,    and    that    li<'    was    making    the 


ASSKSSMENT    OK   THE    FeDEKAE    CoiiPOKATlO.N    TaX.  151 

l<ii)chase  uiuk-r  duress.  The  petition  did  allege  that  the  Imihliiig  company 
was  unwilJing  to  accept  an  unstamped  conveyance,  and  tiiat  tiie  .stamps  were 
thereupon  affixed  in  order  to  complete  the  transaction  and  obtain  tiie  consid 
oration,  but  if  that  constituted  duress  as  between  Cheesebrough  and  his  build- 
ing company  it  was  a  matter  with  which  the  collector  had  nothing  to  do.  On 
tlie  face  of  the  petition  the  purchase  was  purely  voluntary  and  made  under 
mutual  mistake  of  law  if  the  law  were  unconstitutional.  But  it  is  said  that 
protest  or  notice  would  have  made  this  payment  involuntary  and  that  be- 
cause something  over  nineteen  months  after  the  payment  petitioner  made  "  a 
written  application  "  to  the  Commissioner  of  Internal  Revenue  for  the  amount 
he  had  paid  for  the  stamps  the  ordinary  rule  did  not  apply,  inasmuch  as  such 
an  application  was  "  the  statutory  equivalent  of  a  common-law  protest  or 
notice  of  suit." 

The  reference  is  to  section  3220  of  the  Revised  Statutes,  which  provides 
that  the  Commissioner  of  Internal  Revenue,  on  appeal  to  him,  may  remit, 
refund,  and  pay  back  all  taxes  erroneously  or  illegally  assessed  or  collected. 
or  that  appears  to  have  been  unjustly  assessed  or  excessive  in  amount,  or  in 
any  manner  wrongfully  collected;  and  also  "repay  to  any  collector  or  deputy 
collector  the  full  amount  of  such  sums  of  money  as  may  be  recovered  against 
him  in  any  court,  for  any  internal  taxes  collected  by  him,  with  the  cost  and 
expenses  of  suit;  "  while  sections  3226,  3227,  and  3228  provide  that  no  suit 
shall  be  maintained  for  the  recovery  of  internal  taxes  alleged  to  have  been 
erroneously  or  illegally  assessed  or  collected  "until  appeal  shall  have  been 
duly  made  to  the  Commissioner  of  Internal  Revenue  "  or  unless  brought  within 
two  years  after  the  cause  of  action  accrued ;  and  that  the  claim  for  refunding 
shall  be  presented  to  the  Commissioner  within  two  years. 

The  words  "  until  appeal  shall  have  been  duly  made  "  appear  to  us  to  imply 
nn  adverse  decision  by  the  collector,  at  least  a  compelled  payment,  or  official 
demand  for  payment,  from  which  the  appeal  is  taken. 

In  Stewart  r.  Barnes,  153  U.  S.  456,  38  L.  Ed.  781,  14  Sup.  Ct.  Rep.  849, 
this  court  treated  the  language  as  providing  for  "an  appeal,"  and  we  think 
correctly. 

This  petition  did  not  set  up  any  ruling  of  the  collector,  either  specific  or 
resulting  from  a  demand  to  which  petitioner  yielded  under  protest  or  witli 
notice,  and  from  which  he  appealed  to  the  Commissioner,  but  averred  that  he 
"  made  a  written  application  "  to  the  Commissioner  to  refund  the  amount  he 
had  paid. 

We  do  not  say  that  this  was  not  sufficient  to  justify  action  by  the  Commis- 
sioner, but  the  averment  as  it  stands  is  not  equivalent  to  stating  a  previous 
adverse  decision  appealed  from.  The  inference  is  that  the  application  was  a 
mere  afterthought,  the  payment  was  voluntary. 

The  Commissioner  might,  nevertheless,  have  allowed  the  claim,  and  doubtless 
would  have  done  so.  in  the  interest  of  justice,  if  there  were  no  particular 
circumstances  to  discredit  it.  and  the  law  had  been  held  unconstitutional  bv 
this  court.  But  he  rejected  it.  and  petitioner  was  remitted  to  his  suit  in  no 
different  plight,  so  far  as  his  cause  of  action  was  concerned,  than  if  he  had 
not  sought  the  Commissioner  at  all. 

In  IT.  S.  r.  Real  Estate  Sav.  Bank,  104  U.  S.  728,  26  L.  Ed.  908,  it  was  held 
that  the   allowance   of  a   claim   by   the   Commissioner  was  equivalent   to   an 


152        Fedeeal  Corporation  Tax  Law. 

account  stated  between  private  parties,  and  binding  on  the  United  States  until 
impeached  for  fraud  or  mistake,  and  that  if  not  paid  on  proper  application 
through  the  accounting  officers  of  the  Treasury  Department,  an  action  might 
he  maintained  on  it  in  the  Court  of  Claims;  while  if  the  claim  were  rejected 
an  action  might  be  prosecuted  against  the  collector.  It  was  not,  however, 
ruled  that  in  the  latter  situation  a  recovery  could  be  had  if  the  original  pay- 
ment had  been  voluntary  and  without  objection. 

It  is  one  thing  for  the  government  to  correct  mistakes,  return  overcharges, 
or  refund  amounts  exacted  without  authority,  when  satisfied  such  action  is 
due  to  justice,  and  quite  another  thing  for  the  government  to  be  compelled  to 
repay  amounts  which,  in  its  view,  have  been  lawfully  collected. 

By  section  3220  authority  is  given  and  opportunity  aflforded  to  do  what  jus- 
tice and  right  are  found  to  require,  and  the  conditions  which  govern  contested 
litigation  may  well  be  regarded  as  waived;  but  it  does  not  follow  that  there 
is  any  statutory  waiver  of  such  conditions  when  the  government  is  proceeded 
against  in  invitum. 

As  we  have  said,  the  purchase  of  these  stamps  was  purely  voluntary,  and  if, 
notwithstanding  recovery  could  be  had,  it  could  only  be  on  protest  or  notice, 
and  there  was  none  such  here,  written  or  verbal,  formal  or  informal. 

It  is  argued  that  the  provisions  of  section  3220,  for  the  repayment  of  judg- 
ments against  the  collector,  rendered  protest  or  notice  unnecessary  for  hia 
protection ;  but  it  was  clearly  demanded  for  the  protection  of  the  government 
in  conducting  the  extensive  business  of  dealing  in  stamps,  which  were  sold 
and  delivered  in  quantities,  and  without  it  there  would  not  be  the  slightest 
vestige  of  involuntary  payment  in  transactions  like  that  under  consideration. 
And  we  find  no  right  of  recovery,  expressly  or  by  necessary  implication,  con- 
ferred by  statute,  in  such  circumstances. 


Sec.  136.  Form  of  Protest.  —  No  particular  form  of  protest  is 
necessary.  The  parties  should  state  that  the  payment  is  made 
under  duress,  and  the  protestant  should  set  forth  the  fact  that  he 
claims  that  the  tax  as  assessed  is  ille2;al,  and  should  specify  the 
specific  grounds  ujK)n  which  tlio  claim  of  illegality  is  based.  The 
protest  should  be  signed  in  the  name  of  the  company  making  the 
payment  by  some  executive  oificer  making  the  same  in  its  l>chalf, 
or  by  its  attorney  duly  authorized  to  act  in  the  premises.  (T.  R. 
March  29,  1910,  No.  IfiOO.)  Cheeselxirough  r.  Uuited  States,  192 
U.  S.  253,  48  L.  E.  432;  Wright  v.  Blakeslec,  101  U.  S.  174,  25 
L.  E.  1048. 


Collection  of  Federal  Corporation  Tax.  153 


CHAPTER  IX. 

COLLECTION  OF  FEDERAL  CORPORATION  TAX. 

Sec.  137.  Collection  of  the  Tax  —  General  Remarks  Thereon. 

—  It  is  made  the  duty  of  the  several  collectors  of  internal  revenue 
throughout  the  United  States,  under  the  immediate  direction  of 
the  commissioner  of  internal  revenue,  and  under  the  general  direc- 
tion of  the  Secretary  of  the  Treasury,  to  see  to  the  collection  of 
the  federal  corporation  tax.  See  United  States  Revised  Statutes, 
^§  3172,  3183. 

Section  3183  of  the  United  States  Revised  Statutes  provides  as 
follows : 

It  shall  be  the  duty  of  the  collectors,  or  their  deputies,  in  their  respective 
districts,  and  they  are  authorized  to  collect  all  the  taxes  imposed  by  law, 
however  the  same  may  be  designated.  And  every  collector  shall  giv»  receipts 
for  all  sums  collected  by  him. 

The  collection  of  the  tax  as  assessed  is  subject  to  the  same 
general  statutory  provisions  as  are  other  internal  revenue  taxes, 
this  fact  being  based  upon  the  provisions  of  section  8  of  the 
Federal  Corporation  Tax  Law  (lines  15-18),  to  the  effect  that 
all  laws  relating  to  the  collection,  remission  and  refund  of  internal 
revenue  taxes,  so  far  as  applicable  to  and  not  inconsistent  with 
the  provisions  of  the  federal  corporation  tax,  are  extended  and 
made  applicable  hereto. 

The  Attorney-General  of  the  United  States  in  his  opinion, 
dated  April  2,  1910  (see  Appendix),  speaks  as  follows,  with 
reference  to  the  assessment  and  collection  of  the  federal  corpora- 
tion tax : 

On  or  before  March  1  of  each  year  returns  are  required  to  be  made  by  th*! 
corporations,  joint  stock  companies,  and  associations  liable  for  the  tax  to  the 
Collector  of  Internal  Revenue  of  the  district  in  which  they  have  their  principal 
places  of  business.     These  returns  are  forwarded  by  the  collector  to  the  Com- 


154        Federal  Corpokation  Tax  Law. 

niissioner  of  Internal  Revenue,  who  shall  make  the  assessments  thereon.  By 
section  3183,  Revised  Statutes,  the  duty  of  collecting  all  taxes  in  their  re 
spective  districts  is  imposed  by  law  on  the  collectors  or  their  deputies,  and 
by  section  3184  it  is  provided  that  the  collector  shall  in  person  or  by  deputy, 
within  ten  days  after  receiving  any  list  of  taxes  from  the  Commissioner  of 
Internal  Revenue,  give  notice  to  each  person  liable  to  pay  any  taxes  stated 
therein,  specifying  the  manner  in  which  such  notice  shall  be  given.  And  in 
the  fifth  paragraph  of  section  38  of  the  Act  of  1909  it  is  provided  that 
assessments  shall  be  made,  and  the  several  companies  liable  to  the  tax  shall 
be  notified  of  the  amount  for  which  they  are  liable  on  or  before  the  1st  day  of 
June  of  each  successive  year.  Therefore  it  is  the  duty  of  the  Commissioner  of 
Internal  Revenue  to  send  to  each  collector  a  list  of  the  companies  liable  for 
the  tax  in  his  district,  showing  the  amounts  for  which  they  are  liable,  within 
such  time  that  the  collector  may  give  the  required  notice  to  such  companies 
on  or  before  the  1st  day  of  June,  and  upon  such  lists  the  collections  are  made. 
These  are  the  only  lists  which  by  statute  are  required  to  be  sent  to  the  col- 
lectors; and  under  the  provision  of  section  3186,  Revised  Statutes,  as  amended, 
which  is  above  quoted,  the  lien  is  fixed  upon  the  assets  of  the  corporation 
when  this  list  comes  into  the  collector's  hands." 


Sec.  138.  To  What  Extent  Is  the  Tax  a  Lien?  — Section 
3186  of  the  United  States  Revised  Statutes  reads  as  follows, 
to  wit : 

If  any  person  liable  to  pay  any  tax,  neglects  or  refuses  to  pay  the  same 
after  demand,  the  amount  shall  be  a  lien  in  favor  of  the  United  States  from 
the  time  when  the  assessment  list  was  received  by  the  collector,  except  when 
otherwise  provided,  until  paid  with  the  interest,  penalties,  and  costs  that  may 
accrue  in  addition  thereto  upon  the  property  and  rights  to  property  belonging 
to  such   person. 

The  question  as  to  whether  a  tax  assessed  under  the  provisions 
of  tlie  Federal  Corporation  Tax  l>aw  l>ecomea  a  lien  upon  the 
property  of  the  company  against  which  the  same  is  assessed,  was 
considered  hv  the  Attornev-Oeneral  of  the  United  States  in  his 
oj)inion  of  date  April  2,  1910.  After  hohlinf]:  that  the  company, 
conccrniiiir  wliich  liis  ojjiiiioii  h;id  Im'cii  invoked,  was  liable  for  the 
excise  t;i\  created  ]>y  section  .38  of  th(>  Act  of  Conjj^ress  of  August 
r>,  l!)0!i,  lie  wiis  iisked  to  render  an  opinion  U|x>n  the  folhnving 
question  :  Whether  m  lien  existed  on  the  assets  of  the  sjiid  cor 
|x»r;itio(i  to  secure  tlie  p.'ivment  of  siiid  feder;il  corporntion  tax, 
;iiii|  iiici(|ciit:ill\-,  when  (he  lien  iittachi^s  to  the  pro])erty  of  n  cor- 
por;itioii  or  joint  stock  conipiiny  liiihh'  for  tiixes  ntider  said  act. 
The  oj»inion  rendered  on  this  quc^slion  is  as  foMows,  to  wit: 


Collection  of  Fi^hjekal  Corporation  Tax.  155 

It  will  Ik'  observed  tliat  there  is  no  express  provision  in  this  act  which 
creates  a  lien  upon  the  property  of  the  corporation,  joint  stock  company,  or 
association  to  secure  the  payment  of  the  tax.  However,  by  section  3186,  Re- 
vised Statutes,  as  amended  by  Act  of  March  1,  1879  (20  Stat.  331),  it  is 
provided  generally  with  reference  to  internal  revenue  taxes,  that  "  if  any 
person  liable  to  pay  any  tax  neglects  or  refuses  to  pay  the  same  after  demand, 
the  amount  shall  be  a  lien  in  favor  of  the  United  States  from  the  time  when 
the  assessment  list  was  received  by  the  collector,  except  when  otherwise  pro- 
vided, until  paid,  with  the  interest,  penalties,  and  costs  that  may  accrue  in 
addition  thereto,  upon  all  property  and  rights  belonging  to  such  person,"  and 
in  the  eighth  paragraph  of  said  section  38,  Act  of  August  5,  1909,  it  is  pro- 
vided that  "all  laws  relating  to  the  collection,  remission,  and  refund  of  in 
ternal  revenue  taxes,  so  far  as  applicable  to  and  not  inconsistent  with  the 
provisions  of  this  section,  are  hereby  extended  and  made  applicable  to  the  tax 
imposed  by  this  section."  The  method  of  assessing  the  tax  and  collecting  the 
same,  as  provided  for  in  the  act  itself  and  in  the  general  statutes,  appears  to 
be  as  follows:  On  or  before  March  1  of  each  year  returns  are  required  to  ba 
made  by  the  corporation,  joint  stock  companies,  and  associations  liable  for 
the  tax  to  the  Collector  of  Internal  Revenue  of  the  district  in  which  they  have 
their  principal  places  of  business.  These  returns  are  forwarded  by  the  col- 
lector to  the  Commissioner  of  Internal  Revenue,  who  shall  make  the  assess- 
ments thereon.  By  section  3183,  Revised  Statutes,  the  duty  of  collecting  all 
taxes  in  their  respective  districts  is  imposed  by  law  on  the  collectors  or  their 
deputies,  and  by  section  3184  it  is  provided  that  the  collector  shall  in  person 
or  by  deputy,  within  ten  days  after  receiving  any  list  of  taxes  from  the  Com 
missioner  of  Internal  Revenue,  give  notice  to  each  person  liable  to  pay  any 
taxes  stated  therein,  specifying  the  manner  in  which  such  notice  shall  be 
given.  And  in  the  fifth  paragraph  of  section  38  of  the  Act  of  1909  it  is  pro- 
vided that  assessments  shall  be  made  and  the  several  companies  liable  to  the 
tax  shall  be  notified  of  the  amount  for  which  they  are  liable  on  or  before  the 
Ist  day  of  June  of  each  successive  year.  Therefore,  it  is  the  duty  of  the  Com- 
missioner of  Internal  Revenue  to  send  to  each  collector  a  list  of  the  com- 
panies liable  for  the  tax  in  his  district,  showing  the  amounts  for  which  they 
are  liable,  within  such  time  that  the  collector  may  give  his  required  notict> 
to  such  companies  on  or  before  the  1st  day  of  June,  and  upon  such  lists  the 
collections  are  made.  These  are  the  only  lists  which  by  statute  are  required 
to  be  sent  to  the  collectors,  and  under  the  provision  of  section  3186,  Revised 
Statutes,  as  amended,  which  is  above  quoted,  the  lien  is  fixed  upon  the  assets 
of  the  corporation  when  this  list  comes  into  the  collector's  hands.  Therefore 
if  the  corporation  in  question  had  distributed  all  of  its  assets  and  had  become 
dissolved  in  the  manner  provided  for  by  law  prior  to  December  31,  1909,  then 
when  the  list  of  assessments  came  into  the  hands  of  the  collector  there  was 
neither  corporation  nor  assets,  and  nothing  upon  which  the  lien  could  attach, 
and  consequently  no  lien  exists  to  secure  the  payment  of  the  taxes. 

Sec.  139.  Enumeration  of  Statutory  Methods  for  Collecting 

the  Tax.  —  With  respect  to  tlie  methods  that  raav  he  employed  bv 
the  federal  government  in  collecting  the  federal  corporation  tax 


156        Federal  Corporation  Tax  Law. 

reference  must  be  hrd  to  the  revised  statutes  of  the  United  States, 
providing  generally  for  the  collection  of  internal  revenue  taxes. 
This  for  the  reason  that  the  Federal  Corporation  Tax  Act  itself 
provides  that  "  all  laws  relating  to  the  collection,  remission  and 
refund  of  internal  revenue  taxes,  so  far  as  applicable  to  and  not 
inconsistent  with  the  provisions  of  the  section,  are  hereby  extended 
and  made  applicable  to  the  tax  hereby  imposed." 

Turning  now  to  the  revenue  laws  applicable  generally  to  the 
collection  of  internal  revenue  taxes  we  find  the  following  methods 
open  to  the  government  as  means  for  the  collection  of  the  annually 
imposed  federal  corporation  tax,  to  wit:  First,  by  distraint 
through  levy  and  sale  of  the  personal  property  of  the  corporation 
against  whom  the  tax  is  imposed ;  second,  by  attachment  and  sale 
of  real  property  of  tlie  company  against  whom  the  tax  is  imposed ; 
third,  by  action  of  debt  against  the  company  against  whom  the 
tax  is  imposed. 

Sec.  140.  Levy  Upon  and  Sale  of  Personal  Property.  —  The 

following  sections  of  the  revised  statutes  of  the  United  States 
are  applicable  in  case  it  becomes  necessary  to  levy  and  sell  per- 
sonal property  of  the  company  in  order  to  secure  payment  of  a 
specific  tax  assessed  against  it  under  the  Federal  Corporation  Tax 
Law: 

Section  3187.  If  any  person  liable  to  pay  any  taxes  neglects  or  refuses  to 
pay  the  sanie  within  ten  days  after  notice  and  demand,  it  shall  l)c  lawful  for 
the  collector  or  his  deputy  to  collect  the  said  tax,  with  five  per  centum  addi- 
tional thereto  and  interest  as  aforesaid,  by  distraint  and  sale  in  the  manner 
herein  provided,  of  the  poods,  chattels,  or  otlier  effects,  including  stocks,  socu- 
rities  and  evidences  of  debt  of  tlie  person  delinquent  as  aforesaid;  Provided, 
that  tli<re  he  exempt^'d  from  distraint  and  sale,  if  Indonging  to  tho  head  of 
a  family,  school  books  and  wearing  apparel  necessary  for  said  family;  also 
arms  for  personal  use,  one  cow,  two  hogs,  five  sheep  and  the  wool  thereof,  pro- 
vided tlic  aggregate  market  valn<>  of  such  sh<'ep  shall  not  exceed  fifty  dollars; 
and  necossary  food  for  such  cow,  hogs  and  sheep  for  a  period  not  exceeding 
tliirtv  days;  fuel  to  an  amount  not  greater  in  value  than  twenty-five  dollars; 
provisions  to  an  amount  not  greater  Hiaii  fifty  dollars;  household  furniture 
kf'j)t  for  use  to  an  amount  not  gr<'ater  than  three  hundred  dollars;  and  the 
books,  tools  or  implements  of  a  trade  or  profession  to  an  amount  not  greater 
than  one  Imndred  ilollars  shall  also  l>e  exempt;  and  tlie  officer  making  tha 
distraint  slial!  summon  three  disinterested  householders  of  the  vicinity,  who 
shall  njijiniise  nnd  set  apart  to  the  owner  th«  amouut  of  property  herein 
declared   to  li»  exempt. 


Collection  of  Federal  Corporation  Tax.     157 

Section  3188.  In  such  case  of  noglect  or  refusal  the  collector  may  levy  or 
by  warrant  may  autliori/e  a  dcpuly  collector  to  levy  upon  all  property  and 
rights  to  property,  except  as  are  exempt  by  the  preceding  section,  belonging 
to  such  person,  or  on  which  the  said  lien  exists  for  the  payment  of  the  sum 
due  as  aforesaid,  with  interest  and  penalty  for  non  payment,  and  also  of  sucn 
further  sum  as  shall  be  sufhcient  for  the  fees,  costs  and  expenses  of  such  levy. 

Section  3189.  All  persons  and  ofBcers  of  companies  or  corporations  are  re- 
quired on  demand  of  a  collector  or  deputy  collector  about  to  distrain,  or 
having  distrained  on  any  property  or  rights  of  property,  to  exhibit  all  books 
containing  evidence  or  statements  relating  to  the  subject  of  distraint  on  the 
property  or  rights  of  property  liable  to  distraint  for  the  tax  due  as  aforesaid. 

Section  3190.  When  distraint  is  made  as  aforesaid  the  officer  charged  with 
the  collection  shall  make,  or  cause  to  be  made  an  account  of  the  goods  .)r 
eflfects  distrained,  and  a  copy  of  which,  signed  by  the  officer  making  such  dis- 
traint shall  be  left  with  the  owner  or  possessor  of  such  goods  or  effects  at  his 
dwelling  or  usual  place  of  business,  with  some  person  of  suitable  age  and  dis- 
cretion, if  any  such  can  be  found,  with  a  note  of  the  sum  demanded  and  the 
time  and  place  of  sale,  and  the  said  officer  shall  forthwith  cause  an  injunction 
to  be  published  in  some  newspaper  within  the  county  wherein  said  distraint 
is  made,  if  a  newspaper  is  published  in  said  county,  or  to  be  publicly  posted 
at  the  post  office,  if  there  be  one  within  five  miles  nearest  to  the  residence  of 
the  person  whose  property  shall  be  distrained,  and  in  not  less  than  two  other 
public  places.  Said  notice  shall  specify  the  articles  distrained  and  the  time 
and  place  for  the  sale  thereof.  Such  time  shall  not  be  less  than  ten  nor  more 
than  twenty  days  from  the  date  of  such  notification  to  the  owner  or  possessor 
of  the  property,  and  the  publication  or  posting  of  such  notice  as  herein  pro- 
vided, and  the  place  proposed  for  the  sale  shall  not  be  more  than  five  miles 
from  the  place  of  making  such  distraint.  Said  sale  may  be  adjourned  from 
time  to  time  by  said  officer  if  he  deems  it  advisable,  but  not  for  a  time  to 
exceed  in  all  thirty  days. 

Section  3191.  When  property  subject  to  tax,  or  upon  which  a  tax  has  not 
been  paid,  is  seized  upon  distraint  and  sold,  the  amount  of  such  tax  shall, 
after  deducting  the  expenses  of  such  sale,  be  first  apportioned  out  of  the  pro- 
ceeds thereof,  to  the  payment  of  the  tax,  and  after  any  assessment  of  such 
tax  has  been  made  upon  such  property,  the  collector  shall  make  a  return 
thereof  in  the  form  required  by  law  and  the  commissioner  of  internal  revenue 
shall  assess  the  tax  thereon. 

Section  3192.  When  any  property  advertised  for  sale  under  distraint,  as 
aforesaid,  is  of  a  kind  subject  to  tax,  and  the  tax  has  not  been  paid,  and  the 
amount  bid  for  such  property  is  not  equal  to  the  amount  of  the  tax,  the 
collector  may  purchase  the  same  in  behalf  of  the  United  States  for  an  amount, 
not  exceeding  the  said  tax.  All  property  so  purchased  may  be  sold  by  the 
collector  under  such  regulations  as  may  be  prescribed  by  the  commissioner  of 
internal  revenue.  The  collector  shall  render  to  the  commissioner  a  definite 
amount  of  all  charges  incurred  in  such  sales,  and  in  case  of  sale  shall  pay 
into  the  treasury  the  surplus,  if  any  there  be,  after  defraying  all  lawful 
charges  and  fees. 

Section  3193.  In  any  case  of  distraint  for  the  payment  of  the  taxes  afore- 
said, the  goods,  chattels,  or  eflfects  so  distrained  shall  be  restored  to  the  owner 


158        Federal  Cokpokation  Tax  Law. 

or  possessor  if,  prior  to  the  sale,  payment  of  the  amount  due  is  made  to  the 
proper  officer  charged  with  the  collection,  together  with  the  fees  and  other 
charges;  but  in  case  of  non-payment  as  aforesaid,  the  said  officers  shall  pro 
ceed  to  sell  the  said  goods,  chattels  or  effects  at  public  auction,  and  shall 
retain  from  the  proceeds  of  such  sale  the  amount  demandable  for  the  use  of 
the  United  States  and  a  commission  of  live  per  centum  thereon  for  his  own 
use,  with  the  fees,  charges  for  distraint  and  sale,  rendering  the  overplus,  if 
any  there  be.  to  the  person  wlio  may  be  entitled  to  receive  the  same. 

Section  31'J4.  In  all  cases  of  sale  as  aforesaid,  the  certificate  of  such  sale 
shall  be  prima  facie  evidence  of  the  right  of  the  officer  to  make  such  sale  and 
conclusive  evidence  of  the  regularity  of  his  proceedings  in  nuiking  the  same, 
and  shall  transfer  to  the  purchaser  all  right,  title  and  interest  of  said  de- 
linquent in  and  to  the  property  sold,  and  where  such  property  consists  of  stocks 
said  certificate  shall  be  notice  when  received,  to  any  corporation,  company  or 
association,  of  said  transfer,  and  shall  be  authority  to  such  corporation,  com- 
pany or  association  to  record  the  same  on  their  books  and  records  in  the  same 
manner  as  if  transferred  or  assigned  by  the  party  holding  the  same,  in  lieu  of 
any  original  or  prior  certificates  which  shall  be  void,  whether  cancelled  or  not. 
And  said  certificates,  where  the  subject  of  sale  is  securities  or  other  evidences 
of  debt,  shall  be  good  and  valid  receipts  to  the  prson  holding  the  same  as 
against  any  person  holding  or  claiming  to  hold  possession  of  such  securities 
or  other  evidences  of  debt. 

Section  3195.  When  anj-^  property  liable  to  distraint  for  taxes  is  not  divis- 
ible so  as  to  enable  the  collector  by  a  sale  of  part  thereof  to  raise  the  whole 
amount  of  the  tax  with  all  costs,  charges  and  commissions,  the  whole  of  such 
property  shall  be  sold,  and  the  surplus  of  the  proceeds  of  the  sale,  after 
satisfying  the  tax,  costs  and  charges,  shall  be  paid  to  the  person  legally  en- 
titled to  receive  the  same;  or  if  he  cannot  be  found,  or  refuses  to  receive  the 
same,  shall  be  deposited  in  the  treasury  of  the  United  States,  to  be  there 
held  for  his  use  until  he  makes  application  therefor  to  the  Secretary  of  the 
Treasury,  who,  upon  such  application,  and  satisfactory  proofs  in  support 
thereof,  shall,  by  warrant  to  the  treasurer,  cause  the  same  to  be  paid  to  the 
applicant. 

Sec.  141.  Attachment  and  Sale  of  Real  Estate.  —  The  follow- 
ing .sections  of  the  revised  statutes  are  applicable  in  case  it  be- 
comes necessary  to  lew  and  sell  real  property  of  the  company  in 
order  to  secure  payment  of  a  sjwcific  tax  assessed  against  it  under 
the  Federal  Corporation  Tax  Law: 

Section  .Tinn.  When  goods,  chattels  or  efTects  sufririont  to  satisfy  <ho  tax 
imj)nscd  upon  any  persf)n  are  not  found  by  the  cnllootor  or  deputy  collector,  lie 
is  authorized  to  collect   the  same  by  Hoi/nre  and   sale  of  re;)!  estate. 

Section  3197.  'Vhc  nlliccr  making  the  seizure  mentioned  in  the  j)receding  sec 
tion  Hhalj  give   notice  to  the  person  whose  rstiite  it    is  proposed   to  sell  by  giv 
ing  him  in  hand,  (t  leaving  at   his  last  or  usual   place  of  ;il)0(l(>.   if  Ik-   has  arvj' 
such  witliin   th«'  collection   district  wh('r<'  such  estate   is  situated,  a   notice  in 
writing,  stating  what  particular  estate  is  to  be  Bold,  describing  the  same  with 


Collection  of  Federal  Corporation  Tax.     159 

reasonable  certainty,  and  tlie  time  when  and  place  where  such  officer  proposes 
to  bell  the  same ;  whicli  time  shall  not  be  less  than  twenty  nor  more  than 
forty  days  from  the  time  of  giving  said  notice.  The  said  officer  shall  also 
cause  a  notification  to  the  same  effect  to  be  published  in  some  newspaper  within 
the  county  where  such  seizure  is  made,  if  any  such  there  be,  and  shall  also 
cause  a  like  notice  to  be  posted  at  the  postoffice  nearest  to  the  estate  seized 
and  in  two  other  public  places  within  the  county;  and  the  place  of  said  sale 
shall  not  be  more  than  five  miles  distant  from  the  estate  seized,  except  by 
special  order  of  the  Commissioner  of  Internal  Revenue.  At  the  time  and  place 
appointed  the  officer  making  such  seizure  shall  proceed  to  sell  the  said  estate 
at  public  auction,  offering  the  same  at  a  minimum  price,  including  the  expense 
of  making  such  levy,  and  all  charges  for  advertising  and  the  officer's  fee  of 
ten  dollars.  When  the  real  estate  so  seized  consists  of  several  distinct  parts 
01  parcels,  the  officer  making  the  sale  thereof  shall  offer  each  tract  or  parcel 
for  sale,  separately,  and  shall,  if  he  deem  it  advisable,  apportion  the  expenses, 
charges,  and  fees  aforesaid  to  such  several  tracts  or  parcels,  or  to  any  of 
them  in  estimating  the  minimum  price  aforesaid.  If  no  person  offers  for  said 
estate  the  amouni  of  said  minimum  price,  the  officer  shall  declare  the  same 
to  be  purchased  by  him  for  the  United  States,  and  in  case  the  same  shall  be 
declared  to  be  purchased  for  the  United  States  the  officer  shall  immediately 
transmit  a  certificate  of  the  purchase  to  the  Commissioner  of  Internal  Revenue, 
and  at  the  proper  time,  as  hereafter  provided,  shall  execute  a  deed  thereunder 
to  its  proportion,  and  the  instrument  of  approval  as  to  its  form  by  the  United 
States  District  Attorney  for  the  district  in  which  the  property  is  situate,  and 
shall  without  delay  cause  to  be  duly  recorded  in  the  proper  register  of  deeds, 
and  immediately  thereafter  shall  transmit  such  deed  to  the  Commissioner  of 
Internal  Revenue.  And  said  sale  may  be  adjourned  from  time  to  time  by 
said  officer  for  not  exceeding  thirty  days,  in  all,  if  he  shall  think  it  advisable 
so  to  do.  If  the  amount  bid  shall  not  be  then  and  there  paid,  the  officer  shall 
forthwith  proceed  to  again  sell  said  estate  in  the  same  manner.  And  it  i'* 
hereby  provided  that  all  certificates  of  purchase  and  deeds  of  property  put- 
chased  by  the  United  States  under  the  internal  revenue  laws  on  sales  for 
taxes,  or  not  issuing  from  the  United  States  courts  which  now  are  or  may 
hereafter  be  found  in  the  office  of  any  collector.  United  States  marshal  oi 
United  States  District  Attorney,  shall  be  immediately  transmitted  by  such 
officers  respectively  to  the  Commissioner  of  Internal  Revenue,  and  it  is  herebv 
further  provided  that  for  the  preparation  and  approval  by  the  United  States 
District  Attorney  of  each  deed  as  above  required,  a  fee  of  $5  shall  be  al- 
lowed to  that  officer,  to  be  paid  by  the  United  States,  and  which  he  shall 
account  for  in  his  emolument  returns. 

Section  3198.  Under  sale  of  real  estate  as  provided  in  the  preceding  sec- 
tion, and  the  payment  of  the  purchase  money,  the  officer  making  the  seizur.^ 
and  sale,  shall  give  to  the  purchaser  a  certificate  of  purchase,  which  shall  sot 
forth  the  real  estate  purchased,  for  whose  taxes  the  same  was  sold,  the  nani> 
of  the  purchaser,  and  the  price  paid  therefor:  and  if  the  said  real  estate  shall 
not  be  redeemed  in  the  manner  and  within  the  time  herein  provided  tlie  said 
collector  or  deputy  collector  shall  execute  to  the  said  purchaser  upon  hi>^ 
surrender  of  said  certificate  a  deed  to  the  real  estate  purchased  by  him  as 
aforesaid,  reciting  the  facts  set  forth   in   said   certificate,  and   in  accordance 


160         Federal  Cokpokation  Tax  Law. 

with  the  laws  of  the  Slate  in  which  said  real  estate  is  situate,  upou  the  sub- 
ject of  sales  of  real  estate  under  execution. 

Section  3199.  The  deed  of  sale  given  in  pursuance  of  the  preceding  section 
shall  be  prima  facie  evidence  of  the  facts  therein  stated;  and  if  the  proceed- 
ings of  tlie  otfer  as  set  forth  have  been  substantially  in  accordance  with  the 
provisions  of  law,  shall  be  considered  and  operate  as  a  conveyance  of  all  the 
right,  title  and  interest  of  the  party  delinquent  in  and  to  the  real  estate 
thus  held  at  the  time  the  lien  of  the  United  States  attached  thereto. 

Section  3200.  Any  collector  or  deputy  collector  may,  for  the  collection  of 
tax  imposed  upon  any  person  committed  to  him  for  collection,  seize  and  sell 
the  lands  of  such  person  situated  in  any  other  collection  district  within  the 
State  in  which  such  officer  resides,  and  his  proceedings  in  relation  thereto 
shall  have  the  same  effect  as  if  the  same  were  had  in  his  proper  collection 
district. 

Section  3201.  Any  person  whose  estate  may  be  proceeded  against  as  afore- 
said sliall  have  the  right  to  pay  the  amount  due,  together  with  the  costs  ami 
charges  thereon,  to  the  collector  or  deputy  collector,  at  any  time  prior  to  the 
sale  thereof,  and  all  further  proceedings  shall  cease  from  the  time  of  such 
payment. 

Section  3202.  The  owners  of  any  real  estate  sold  as  aforesaid,  or  their  heirs, 
executors,  administrators  or  any  person  having  any  interest  thereon  or  a  lion 
thereof,  or  any  person  in  their  behalf,  shall  be  permitted  to  redeem  the  land 
sold,  or  any  particular  tract  thereof,  at  any  time  within  one  year  after  the 
sale  tiioroof  upon  payment  tf  the  purchaser,  but  in  case  he  cannot  be  found 
witiiin  the  county  in  which  the  land  to  be  redeemed  is  situate,  then  to  th" 
collector  of  the  district  in  which  the  land  is  situate,  for  the  use  of  the  pur- 
chaser, his  heirs  or  assigns,  the  amount  paid  by  the  said  purchaser  and 
interest  thereon  at  the  rate  of  twenty  j)er  centum  jmt  annum. 

Section  3203.  It  shall  be  the  duty  of  every  collector  to  keep  a  record  of  all 
sales  of  land  made  in  his  collection  district,  whether  by  iiimself  or  his  depu- 
ties, or  by  any  collector,  in  whicli  shall  be  set  forth  the  tax  for  which  any 
such  sale  was  made,  the  (hit<'s  of  seizure  and  sale,  the  name  of  the  party  as 
sesse<l,  and  all  proceedings  in  making  said  sale,  tiie  amount  of  fees  and  ex- 
penses, the  name  of  the  purchaser  and  the  date  of  the  deed.  And  on  or  about 
the  5th  day  of  each  succeeding  month  he  sliall  transmit  a  copy  of  such  record 
of  the  i)rcccding  month  to  the  Commissioner  of  Internal  Revenue.  And  it 
shall  1m'  the  dnty  nf  every  deputy  making  the  sale  as  aforesaid  to  return  a 
fltatoment  <>f  ail  iiis  proceedings  to  the  collector,  and  to  certify  the  record 
thereof.  In  case  of  the  death  or  removal  of  Ww  collator,  or  expiration  of  his 
term  of  oHife.  or  from  any  other  raus<'.  said  record  shall  be  (hdivered  to  his 
succ«'HSor  in  ollice ;  and  a  copy  I'f  <'vpry  soch  record,  certified  by  tlie  Cdilector, 
shall  be  evidence  in  any  court  <if  tin'  tnitli  nf  the  facts  therein  stated. 

S<'cti(in  3201.  \\  Inn  ;iri\  hiiKis  sold  jis  aforesaid  are  redeemed  !is  heretofore 
provided,  tlie  eolleetor  shall  make  entry  nf  the  fact  upon  the  r<'oord  men- 
tioni-d  in  the  [)receding  section,  and  the  said  entry  shall  be  evidence  of  said 
redeni|)tion. 

Section  3207.  In  any  casi-  where  tli<re  lias  been  a  refusal  or  neglect  to  pay 
any  tax  and  it  has  becntiie  necessary  to  seize  and  sell  real  estate  to  satisfy 
the  same,   the  Commissioner  of   Int4'rnal   Revenue  may   direct   n   bill   in  chan- 


Collection  of  Federal  Corporation  Tax.     101 

eery  to  be  filed  in  a  district  or  circuit  court  of  the  United  States,  to  enforce 
the  lien  of  the  United  States  for  tax  upon  any  real  estate,  or  to  subject  any 
roal  estate  owned  by  delinquent,  or  in  which  he  has  any  riglit,  title  or  interest 
to  the  payment  of  such  tax.  Any  person  having  liens  upon  or  claiming  any 
interest  in  the  real  estate  sought  to  be  subject,  as  aforesaid,  shall  be  made 
parties  to  such  proceedings  and  be  brought  into  court  as  provided  in  other 
suits  in  chancery  therein.  And  the  .said  court  shall,  at  the  term  next  after  the 
parties  have  been  duly  notified  of  the  proceedings,  unless  otherwise  authorized 
by  the  court,  proceed  to  adjudicate  all  matters  involved  therein  and  finally 
determine  the  merits  of  all  claims  to  and  liens  upon  the  real  estate  in  question, 
and  in  all  cases  where  a  claim  or  interest  of  the  United  States  is  established, 
shall  decree  a  sale  of  said  real  estate  by  the  proper  officer  of  the  court,  and  the 
distribution  of  the  proceeds  of  such  sale,  according  to  the  findings  of  the 
court  in  respect  to  the  interests  of  the  parties  and  of  the  United  States. 

Section  3208.  The  Commissioner  of  Internal  Revenue  shall  have  charge  of 
all  real  estate  which  is  now  or  shall  become  the  property  of  the  United  States 
by  judgment  or  forfeiture  under  the  internal  revenue  laws,  or  which  has 
been  or  shall  be  assigned,  set  oflF  or  conveyed  by  purchase,  deed  or  otherwi.se 
to  the  United  States  in  payment  of  debts  or  penalties  arising  under  tlie  laws 
relating  to  internal  revenue,  or  which  has  been  or  shall  be  oflsot  in  the  United 
States  by  mortgage  or  other  security  for  the  payment  of  such  debts,  and  of 
all  trusts  created  for  the  use  of  the  United  States  in  payment  of  such  debts 
due  them;  and,  with  the  approval  of  the  Secretary  of  the  Treasury,  may,  at 
public  vendue,  upon  not  less  than  twenty  days'  notice,  sell  and  dispose  of  all 
real  estate  owned  or  held  by  the  United  States  aforesaid;  and  until  such  sale 
the  Commissioner  of  Internal  Revenue,  with  the  approval  of  the  Secretary  of 
the  Treasury,  may  lease  said  real  estate  owned  as  aforesaid,  on  such  terms  and 
for  "such  period  as  they  shall  deem  expedient.  And  in  cases  where  real  estate 
has  or  may  bcome  the  property  of  the  United  States  by  conveyance  or  other- 
wise, -n  payment  of  or  as  security  for  a  debt  arising  under  the  laws  relating 
to  internal  revenue,  and  such  debt  shall  have  been  paid,  together  with  the 
interest  thereon  at  the  rate  of  one  per  centum  per  month  to  the  United  States 
within  two  years  from  the  date  of  the  acquisiion  of  such  real  estate,  it  shall 
be  lawful  for  the  Commissioner  of  Internal  Revenue,  with  the  approval  of  the 
Secretary  of  the  Treasury,  to  release  by  deed  or  otherwise  convey  such  real 
estate  to  the  debtor  from  whom  it  was  taken,  or  to  his  heirs  or  other  lef^al 
representatives. 

Section  3209.  Whenever  a  collector  has  on  any  such  list  duly  returned  to 
him  the  name  of  any  person  not  within  his  collection  district,  who  is  liable 
to  such  tax,  or  any  person  so  liable  who  has  in  the  collection  district  in  wliich 
he  resides  no  sufficient  property  subject  to  seizure  or  distraint  from  which  the 
money  due  for  taxes  can  be  collected,  such  collector  shall  transmit  a  statement 
containing  the  name  of  the  person  liable  to  such  tax.  with  the  amount  and 
nature  thereof,  duly  certified  under  his  hand,  to  the  collector  of  any  district  to 
which  such  person  shall  have  been  removed,  or  in  which  he  shall  have  prop- 
erty, real  or  personal,  liable  to  be  seized  and  sold  for  tax.  And  the  collector  to 
whom  said  certified  statement  is  transmitted  shall  proceed  to  collect  the  said 
tax  in  the  same  way  ns  if  the  name  of  the  person  and  objects  of  tax  contained 
in  the  said  certified  statement  were  on  any  list  of  his  own  collection  district; 
Fed.  Corp.  Tax  —  1 1 


162        Federal  Corporation  Tax  Law. 

and   lie  shall,   upon  receiving  said  certified  statement  as   aforesaid,  transmit 
his  receipt  for  it  to  the  collector  sending  the  same  to  him. 

In  addition  to  the  foregoing  sections  attention  should  be  called 
to  section  3205  of  the  United  States  Revised  Statutes,  which  reads 
as  follows : 

Section  3205.  Whenever  any  property,  personal  or  real,  which  is  seized  and 
sold  by  virtue  of  the  foregoing  provisions,  is  not  sufficient  to  satisfy  the 
claim  of  the  United  States  for  which  distraint  or  seizure  is  made,  the  collec- 
tor may  thereafter,  and  as  ofttm  as  the  same  may  be  necessary,  proceed  to 
seize  and  sell  in  like  manner  any  other  property  liable  to  seizure  of  the  person 
against  whom  such  claim  exists,  until  the  amount  due  from  him,  together 
with  all  expenses,  is  fully  paid. 


Sec.  142.  Action  of  Debt.  —  It  is  unquestionable  that  an 
action  of  debt  will  always  lie  in  favor  of  the  government  to 
recover  the  amount  of  the  assessment  made  by  the  commissioner 
of  internal  revenue  against  a  company  under  the  provisions  of  the 
Federal  Cor}x>ration  Tax  Law.  Dollar  Savings  Bank  v.  United 
States,  19  Wall.  227. 

Under  section  3214  of  the  United  States  Revised  Statutes  no 
suit  for  the  recovery  of  taxes  or  of  any  fine,  penalty  or  forfeiture 
can  1)0  commenced  unless  the  conmiissioner  of  internal  revenue 
authorizes  and  sanctions  the  proceeding. 

In  this  connection  attention  is  called  to  the  opinion  of  the 
Attorney-General  of  date  April  2,  1910  (see  Ajjjx'ndix  II), 
wherein,  after  hohliii*:  that  the  govermnciit  in  the  particular  case 
upf)n  which  his  dpinioii  was  asked  as  to  a  general  levy  u]ion  the 
property  of  a  cori^oratioii  against  whom  the  fcnleral  corporation 
tax  was  sought  to  be  asse^ssed,  rnnarkcd  as  foUows: 

3.  Notwithstanding  the  fact  tliat  tlic  particular  method  of  collecting  this 
excise  tax  is  jtn-sciiix'd  in  tiie  st!itiit<',  y<'t  sucli  remedy  is  not  exclusive,  and 
the  government  may  ri'sr)rt  to  tin'  iiiimiiini  l:i\\  iiictliiid  nf  cdllf't't  ing  the  .same. 
Such  was  the  holding'  df  (lif  Siiprt'm<'  Court  of  tlu"  I'liited  Stales  in  Savings 
]?!iT'k  r.  The  Tnitid  ^hitcs,  1<)  Wall.  227,  240,  with  refen-nce  to  the  collec- 
tion of  a  tax  UfidiT  ail  t\ci  which  levied  n  tax  of  .'')  per  ci-ntum  on  all  dividends 
in  Bcrip  or  mo?i<'v  dci-l:irci|  due  to  stipcklnililrrs,  ]iiilicyli<)ld('is  or  (h'positors  as 
part  nf  tlic  earnings,  income  or  gains  of  any  bank,  trust  company,  savings 
institut  inn,  and  of  any  insurance  company.  The  di'^solution  of  a  corporatio.i 
d'M'H  not  exlingiiisli  its  liabilities;  and  tlirough  courts  of  e(]uity  creditors  nuiy 
purHUC   ittt  assets    into    the    bands   nf   any    jxTson    who    is   not   a    tiiinn   fidr    j)ur- 


Collection  of  Federal  CoRPOiiAxioN'  Tax.  163 

cliaser.  Muniina  v.  Potomac  Company,  8  Peters  281,  28G;  Curran  v.  Arkansas, 
ir>  Howard  304,  307;  Railroad  Company  f.  Howard,  7  Wall.  392,  410;  Scara- 
mon  v.  Kimball,  U2  U.  S    3U2,  307. 

Ill  Railroad  Company  r.  Howard  the  court  said: 

"Assets  derived  from  the  sale  of  the  capital  stock  of  the  corporation,  or  of 
its  property,  bec(mu's,  as  respects  creditors,  the  substitutes  for  the  things  sold, 
and  as  such  they  are  subject  to  the  same  liabilities  and  restrictions  as  the 
things  sold  were  before  the  sale,  and  while  tliey  remained  in  the  possession 
of  the  corporation.  Even  the  sale  of  the  entire  capital  stock  of  the  com- 
pany and  the  division  of  the  proceeds  of  the  sale  among  the  stockholders  will 
not  defeat  the  tiust  nor  impair  the  remedy  of  the  creditors,  if  any  debts 
remain  unpaid,  as  the  creditors  in  that  event  may  pursue  the  consideration 
of  the  sale  in  the  hands  of  the  respective  stockholders,  and  compel  each  one, 
to  the  extent  of  the  fund,  to  contribute  pro  rata  toward  the  payment  of  their 
debts  out  of  the  moneys  so  received  and  in  their  hands." 

If  the  corporation  in  question  engaged  in  business  after  the  approval  of 
the  Act  of  August  5,  1909,  then  it  was  liable  for  the  tax,  though  it  may  not 
have  become  due  until  after  the  corporation  was  dissolved ;  and  the  govern 
ment  may  collect  the  tax  by  pursuing  the  assets  of  the  corporation  into  the 
hands  of  the  stockholders  in  the  same  manner  as  that  by  which  any  other 
creditor  might  obtain  satisfaction  of  his  debt.  (See  T.  D.  1615,  April  15, 
1910,  Appendix  N.) 


Sec.  143.  Powers  of  the  Secretary  of  the  Treasury  In  the 
Collection  of  the  Tax.  —  In  addition  to  his  general  power  to 
superintend  the  collection  of  revenue,  the  Secretary  of  the  Treas- 
ury has  under  section  251  of  the  United  States  Revised  Statutes 
the  following  powers,  to  wit: 

The  Secretary  of  the  Treasury  shall  make  and  issue,  from  time  to  time,  such 
instructions  and  regulations  to  the  several  collectors,  receivers,  depositaries, 
officers  and  others  who  may  receive  treasury  notes.  United  States  notes,  and 
other  securities  of  the  United  States,  or  who  may  be  in  any  way  connected  or 
employed  in  the  appropriation  and  issue  of  the  same,  as  he  shall  deem  best 
calcu'lated  to  promote  the  public  convenience  and  security,  and  to  protect  the 
United  States,  as  well  as  individuals,  from  fraud  and  loss  or  shall  prescribe 
the  terms  of  interest,  oaths,  bonds  and  other  papers,  and  rules  and  regulations 
not  inconsistent  with  law,  to  be  used  under  and  in  the  execution  and  enforce- 
ment of  the  various  provisions  of  the  internal  revenue  laws,  or  in  carrying  out 
the  provisions  of  law  relating  to  raising  revenue  from  members  or  to  duties 
on  members,  or  to  warehousing,  or  shall  give  such  directions  to  collectors  and 
prescribe  such  rules  and  forms  to  be  observed  by  them  as  may  be  necessary  for 
the  proper  execution  of  the  law;  he  shall  proscribe  the  forms  of  the  annual 
statements  to  be  submitted  to  Congress  by  him,  showinir  the  actual  state  of 
commerce  and  navigation  between  the  United  States  and  foreign  countries  or 
coastwise,  and  between  the  collection  districts  of  the  United  States  in  each 
year.      (See  section  146,  post.) 


104  Federal  Corporation  Tax  Law. 

Sec.  144.  Powers  of  Commissioner  of  Internal  Revenue  In 
the  Collection  of  the  Tax.  —  The  powers  of  the  commissioner  of 
internal  revenue  with  reference  to  the  collection  of  the  Federal 
Corporation  Law  are  governed  by  section  321  of  the  United 
States  Revised  Statutes,  which  reads  as  follows: 

The  Commissioner  of  Internal  Revenue,  under  the  direction  of  the  Secretary 
of  the  Treasury,  shall  have  general  superintendence  of  the  assessment  and  col- 
lection of  all  duties  and  taxes  now  or  hereafter  imposed  by  law,  providing 
internal  revenue;  and  shall  prepare  and  distribute  all  the  instructions,  regu- 
lations, directions,  forms,  instruments  and  other  matters  pertaining  to  the 
collection  and  assessment  of  internal  revenue,  and  shall  provide  hydrometers 
and  proper  and  sufficient  adhesive  stamps  and  stamps  or  dies  for  expressing 
and  denoting  stamp  duties,  or  in  the  case  of  personal  duties,  the  amount 
thereof,  and  alter  or  renew  or  replace  such  stamps  from  time  to  time  as  occa- 
sion may  require.  He  may  also  contract  for  or  procure  the  printing  of  such 
forms,  decisions  and  regulations,  but  the  printing  of  such  forms,  decisions  and 
regulations  shall  be  done  at  the  Public  Printing  Office,  unless  the  Public 
Printer  shall  be  unable  to  perform  the  work;  Provided,  that  the  Commissioner 
of  Internal  Revenue  may,  under  such  regulations  as  may  be  established  by 
the  Secretary  of  the  Treasury,  after  public  notice,  receive  bids  and  make  con- 
tracts for  supplying  stationery,  blank  books  and  blanks  to  the  collectors  in 
the  several  collection  districts,  the  expense  of  assessing  and  the  expense  of 
the  collection  of  internal  revenue.      (See  section  146,  post.) 

Attention  is  called  to  tlie  folhnving  sections,  United  States  Re- 
vised Statutes,  which  read  as  follows: 

Section  3152.  The  Commissioner  of  Tnternal  Revenue  may,  whenever  in  his 
judgment  the  necessities  nf  the  service  so  rociuire,  em])loy  competent  agents  not 
exceeding  at  any  time  tliirtyfive  in  number,  to  be  paid  such  compensation  as 
he  may  deem  proper,  not  exceeding  in  aggregate  any  proportion  made  for  that 
purpose,  or  he  may,  at  his  discretion,  assign  any  such  agent  to  duty  under  the 
direction  of  any  officer  of  internal  revenue,  or  to  such  other  special  duty  as 
he  may  deem  nwessary ;  and  no  general  or  special  agent  or  inspector,  by  what- 
ever designation  lie  may  lie  known,  of  the  treasury  department,  in  connection 
with  the  internal  revenu<',  exc«'pt  inspectors  of  tobacco,  sn>i(T  and  cigars,  and 
except  as  j)rovi(led  for  in  lliis  title,  shall  be  appointed,  commissioned,  employed 
fir  cf)iitinue(l  in  offi(<\ 

Section  '.Wi'i'A.  Kv<'ry  collector  within  liis  cullrctiori  district,  and  every  in- 
ternal revenue  agent,  shall  see  that  all  laws  and  regulations  relating  to  the 
cfdlection  of  internal  taxes  are  faithfully  complied  with;  and  shall  aid  in  tlie 
prevention,  detection  and  punisliment  of  any  frauds  in  relation  thereto.  i( 
shiill  !"•  (lie  iliitv  of  <-v<ry  colli'ilor  mid  of  rvcry  internal  revenue  agent  to  re 
port  to  the  CornmisHinncr  in  writing  any  ncglfct  of  duty,  incompetency,  deliii 
quency  or  malfeMsanc.'  in  odicf  of  any  iii1<'rniil  revi-nnc  odlcer  of  wliicli  lie 
inav  ol>f;iin  knowledge,  with  a  statf-nieni  of  nil  the  f;ic)s  in  i'mcIi  case  sustain- 
ing the  H.'inir.     Tlic  Coininissioncr  may  transfer  any  iiis|ii('lor.  gauge  or  store- 


Collection  of  Federal  Corporation  Tax.     165 

keeper,  or  storekeeper  and  gauger,  from  one  distillery  or  other  place  of  duty, 
or  from  one  collection  district  to  another. 


Sec.  145.  Powers  of  Collectors  of  Internal  Revenue  In  the 
Collection  of  the  Corporation  Tax.  —  To  ascertain  the  powers  of 
collectors  of  internal  revenue  in  the  collection  of  the  federal  cor- 
poration, tax  reference  must  be  had  to  those  sections  of  the  revised 
statutes  of  the  United  States  applicable  generally  to  the  collec- 
tion of  internal  revenue  taxes.  The  sections  to  which  reference  is 
here  had  read  as  follows,  to  wit : 

Section  3164.  It  shall  be  the  duty  of  every  collector  of  internal  revenue  to 
report  within  ten  days  to  the  District  Attorney  of  the  district  in  which  any 
fine,  penalty  or  forfeiture  may  be  incurred  for  the  violation  of  any  law  of  th« 
United  States  relating  to  the  revenue,  a  statement  of  all  the  facts  and  cir- 
cumstances of  the  case  within  his  knowledge,  together  with  the  names  of  th? 
witnesses,  and  which  may  come  to  his  knowledge  from  time  to  time,  stating 
the  provisions  of  the  law  believed  to  be  violated,  and  if  any  collector  shall  in 
any  case  fail  to  report  to  the  proper  District  Attorney,  as  prescribed  in  this 
section,  his  right  to  any  compensation,  benefit  or  allowance  in  such  case  shall 
be  forfeited  to  the  United  States,  and  the  same  may  in  the  discretion  of  tht; 
Secretary  of  the  Treasury  be  awarded  to  such  persons  as  may  make  complaint 
and  prosecute  the  same  to  judgment  or  conviction. 

Section  3165.  Every  collector,  deputy  collector  and  inspector  is  authorized 
to  administer  oaths,  and  to  take  evidence  touching  any  part  of  the  administra- 
tion of  the  internal  revenue  laws  with  which  he  is  charged,  or  where  such 
oaths  and  evidence  are  authorized  by  law  or  regulation  authorized  by  law,  to 
be  taken. 

Section  3172.  That  every  collector  shall,  from  time  to  time,  cause  his  depu- 
ties to  proceed  through  every  part  of  his  district,  and  inquire  after  and  con- 
cerning all  persons  therein  who  are  liable  to  any  internal  revenue,  and  all 
persons  owning  or  having  the  eare  and  management  of  any  objects  liable  to 
pay  any  tax,  and  to  make  a  list  of  such  persons  and  enumerate  such  objects. 

Section  3173.  That  it  shall  be  the  duty  of  any  person,  partnership,  firm,  as- 
sociation or  corporation  made  liable  to  any  duty,  special  tax.  stamp  or  tax 
imposed  by  law,  when  not  otlierwise  provided  for.  in  case  of  a  special  tax  on 
or  before  the  31st  day  of  July  in  each  year,  and  in  case  of  income  taxes,  on 
vT  before  the  first  IMonday  in  March  of  each  year,  and  in  other  cases  before 
the  day  on  which  taxes  accrue,  to  make  a  list  or  return,  verified  by  oath  or 
affirmation,  to  the  collector  or  deputy  collector  of  the  district  where  located, 
of  the  articles  or  objects,  including  tlio  amount  of  annual  income,  cliarged 
with  a  duty  or  tax.  the  quantity  of  goods,  wares  and  merchandise  made  or 
sold  and  charged  witli  a  tax,  the  several  rates  and  aggregate  amount,  accord- 
ing to  the  forms  and  regulations  to  be  proscribed  by  the  Commissioner  of  In- 
ternal Revenue,  under  the  direction  of  the  Secretary  of  the  Treasury,  for 
which  such  person,  partnership,  firm,  association  or  corporation  is  liable: 
provided  that   if  any  person  liable  to   pay  any  duty  or  tax  or  owning,  pos- 


16G         Federal  Corporation  Tax  Law. 

sessing  or  having  the  care  or  management  of  property,  goods,  wares  and  mer- 
chandise, articles  or  objects  liable  to  any  duty,  tax  or  license,  shall  fail  to 
make  and  exhibit  a  list  or  return  required  by  law,  but  shall  consent  to  disclose 
the  particulars  of  any  and  all  the  property,  goods,  wares  and   merchandise, 
articles  and  objects  liable  to  pay  any  duty  or  tax,  or  any  business  or  occupa- 
tion liable  to  pay  any  tax  aforesaid,  then  and  in  that  case  it  shall  be  the 
duty  of  the  collector  or  deputy  collector  to  make  such  list  or  return,  which 
being  distinctly  read,  consented  to  and  signed  and  verified  by  oath  or  aliinna- 
tion  by  the  person  so  owning,  possessing  or  having  the  care  and  management 
as  aforesaid,  may  be  received  as  the  list  of  such  person;   Provided,  furthec, 
that  in  case  no  annual  list  or  return  has  been  rendered  by  such  person  to  the 
collector  or  deputy  collector,  as  required  by  law,  and  the  person  shall  be  absent 
from   his  or  her  residence  or   place  of  business  at  the  time  the  collector  or 
deputy  collector  shall  call  for  the  annual  list  or  return,  it  shall  be  the  duty 
of  such  collector  or  deputy   collector  to   leave  at  such   place  of   residence  or 
business,  with  some  one  of  suitable  age  and   discretion,   if   such   be   present, 
otherwise  to  deposit  it  in  the  nearest  postoffice,  a  note  or  memorandum,  ad 
dressed  to  such  person,  requiring  hira  or  her  to  render  to  such  collector  or 
deputy  collector  the  list  or  return  required  by  law  within  ten  days  from  the 
date  of  such  note  or  memorandum ;   verified  by  oath  or  aflirmation.     And  i^ 
any  person,  on  being  notified  or  required  as  aforesaid,  or  whenever  any  person 
who  is  required  to  deliver  a  monthly  or  other  return  of  objects  subject  to  tax, 
fails  to  do  so  at  the  time  required,  or  delivers  any  return  wliich.  in  the  opinion 
of  the  collector  is  false  or  fraudulent,  or  contains  any  undervaluation  or  un- 
(ierstatement,  it  shall  be  lawful  for  the  collector  to  summon  such  person,  or  any 
other  person  having  possession,  custody  or  care  of  books  of  account,  containing 
entries  relating  to  the  business  of  such  person,  or  any  other  person  he  may 
dwm  proper,  to  appear  before  him  and  produce  such  books  at  a  time  and  place 
named  in  the  summons,  and  to  give  testimony  or  answer  interrogatories  under 
oath,  respecting  any  objects  liable  to  tax  or  the  returns  thereof.     The  collec 
tor  may  summon  any  person  residing  or  found  within  the  State,  in  which  his 
district  lies;    and  when  the  person   intended  to  be  summoned  does  not   reside 
and  cannot  be  found  within  such  State,  he  may  enter  any  collection  district 
where    such    person   may    he    found,   and    there    make   the  examination    herein 
authorized.     And  to  this  end  he  may  there  exercise  all  the  avithority  which  he 
might  lawfully  exercise  in  the  district  for  which  he  was  Commissioner. 

Section  :n74.  Such  summons  shall  in  all  eases  be  served  by  a  deputy  collec 
tor  of  the  district  where  tlie  ])ers()ii  to  whom  it  is  directed  may  be  found,  by 
an  attested  copy  delivered  to  such  person  in  hand,  or  left  at  his  last  and  usual 
place  »)f  abode,  iillowing  such  p<"rHon  one  day  for  each  twenty  five  miles  he  may 
\h'  re(|uired  to  travi'l.  eomputed  from  tlie  place  of  service  to  the  place  of 
examination;  antl  n  ecrtificMtr  nf  serviee  signed  by  sueli  deputy  shall  l>e  evi- 
dene<-  of  tlie  facts  lie  states  on  the  hearing  of  an  ai.plicjition  for  an  attach- 
nu'nt.  Wlu'ii  the  Hiimmons  requires  the  jiroduction  of  books,  it  shall  Iw  suf- 
ficient if  sueli  books  are  described  with  reasonal>le  eertainty. 

Section  317r».  Whenever  any  person  suiiinioTU'd  imdcr  tlw  two  preceding  sec- 
tions n<rlects  or  refuses  to  obey  sucli  siininions.  or  to  fiiv.-  testimony,  or  to 
answ.T  interrn^ratories  as  required,  the  eoll<-etors  may  apply  to  tlie  judge  of 
the  District  Court,  or  to  a  commissioner  of  the  Circuit  Court  of  the  United 


Collection  of  Fedekal  Corporation  Tax.     10 


*r 


States  for  the  district  within  which  the  person  so  summoned  resides,  for  an 
attachment  against  him,  as  for  contempt.  It  shall  be  the  duty  of  the  judge 
or  commissioner  to  hear  the  application,  and  if  satisfactory  proof  is  made  to 
issue  an  attachment  directed  to  some  proper  officer  for  the  arrest  of  such  per- 
son, and  upon  his  being  brought  before  him  to  proceed  to  a  hearing  of  the  case, 
and  upon  such  hearing  the  judge  or  commissioner  shall  have  power  to  mak<! 
such  order  as  he  shall  deem  proper,  not  inconsistent  with  existing  laws  for  the 
punishment  of  contempts,  to  enforce  obedience  to  the  requirements  of  the 
summons,  and  to  punish  such  persons  for  his  default  or  disobedience. 

Section  317G.  When  any  person,  corporation,  company  or  association  refuses 
or  neglects  to  render  anj'  return  or  list,  the  collector  or  any  deputy  collector 
shall  make,  according  to  the  best  knowledge  which  he  can  obtain,  including 
that  derived  from  the  evidence  elicited  by  examination  of  the  collector  and  on 
his  own  view  and  information,  such  list  or  return,  according  to  the  form  pre- 
scribed, of  the  income,  property  and  objects  liable  to  taxation  owned  or  pos- 
sessed or  under  the  care  or  management  of  such  person  or  corporation,  com- 
pany or  association,  and  the  Commissioner  of  Internal  Revenue  shall  assess 
all  taxes  not  paid  by  stamps,  including  the  amount,  if  any,  due  for  special 
tax,  income  or  other  tax,  and  in  case  of  any  return  of  a  false  or  fraudulent  list 
or  valuation  intentionally,  he  shall  add  one  hundred  per  centum  to  such  tax; 
and  in  case  of  a  refusal  or  neglect,  except  in  cases  of  sickness  or  absence,  to 
make  a  list  or  return,  or  to  verify  the  same  as  aforesaid,  he  shall  add  fifty 
per  cent,  to  such  tax.  In  case  of  neglect  occasioned  by  sickness  or  absence  as 
aforesaid,  the  collector  may  allow  such  further  time  for  making  and  deliver- 
ing such  list  or  return  as  he  may  deem  necessary,  not  exceeding  thirty  days. 
The  amount  so  added  to  the  tax  shall  in  all  cases  be  collected  at  the  same  time 
and  in  the  same  manner  as  the  tax,  unless  the  neglect  or  falsity  is  discovered 
after  the  tax  has  been  paid,  in  which  case  the  amount  so  added  shall  be  col- 
lected in  the  same  manner  as  the  tax,  and  the  list  or  return  so  made  and  sub- 
scribed by  such  collector  or  deputy  collector  shall  be  held  prima  facie  good 
and  sufficient  for  all  lawful  purposes. 

Section  3177.  Any  collector,  deputy  collector  or  inspector  may  enter  in  the 
day  time  any  buildings  or  place  where  any  articles  or  objects  subject  to  tax  are 
made,  produced  or  kept  within  his  district,  so  far  as  it  may  be  necessary,  for 
the  purpose  of  examining  said  articles  or  objects.  And  any  owner  of  such 
building  or  place,  or  person  having  the  agency  or  superintendence  of  the  same, 
who  refuses  to  admit  such  officer,  or  to  suffer  him  to  examine  such  article  or 
articles,  shall,  for  every  such  refusal,  forfeit  five  hundred  dollars.  And  when 
such  premises  are  open  at  night,  such  officers  may  enter  them  while  open  in' 
the  performance  of  their  official  duties.  And  if  any  person  shall  forcibly  ob- 
struct or  hinder  any  collector,  deputy  collector  or  inspector  in  the  execution 
of  any  power  and  authority  vested  in  him  by  law.  or  shall  forcibly  rescue  or 
cause  to  be  rescued  any  property,  articles  or  objects  after  the  same  shall  have 
been  seized  by  him,  or  shall  attempt  or  endeavor  so  to  do,  the  person  so  offend- 
ing, excepting  in  cases  otherwise  provided  for.  shall,  for  every  such  offense, 
forfeit  and  pay  the  sum  of  five  hundred  dollars,  or  double  the  value  of  the 
Tiroperty  so  rescued,  or  be  imprisoned  for  a  term  not  exceeding  two  years,  at 
tli*»  discretion  of  the  court. 

Section   .3178.  All   persons   required   to    make    returns    or    lists   of  objects 


168         Federal  Corporation  Tax  Law. 

charged  with  an  internal  tax,  shall  declare  therein  whether  the  several  rates 
and  amounts  are  stated  according  to  their  value  in  legal  tender  currency,  or 
according  to  their  values  in  coin  money,  and  in  case  of  neglect  or  refusal  so  to 
declare  to  the  satisfaction  of  the  collector  receiving  such  returns  or  list,  such 
officer  shall  make  returns  or  lists  for  such  persons  so  neglecting  or  refusing, 
as  in  cases  of  persons  neglecting  or  refusing  to  make  the  returns  or  lists 
required  by  law,  and  the  Commissioner  shall  assess  the  tax  thereon,  and  add 
thereto  the  amount  imposed  by  law  in  eases  of  such  neglect  or  refusal.  And 
whenever  the  rates  and  amounts  contained  in  the  returns  or  lists  are  stated 
in  coin  money,  the  collector  receiving  the  same  shall  reduce  them  to  their 
equivalent  in  legal  tender  currency,  according  to  the  value  of  such  coined 
money  in  such  currency  for  the  time  covered  by  such  returns. 

Section  3179.  Whenever  any  person  delivers  or  discloses  to  the  collector  or 
deputy  any  false  or  fraudulent  list,  return,  account  or  statement  with  intent 
to  defeat  or  evade  the  valuation,  enumeration  or  assessment  intended  to  be 
made,  or  being  duly  summoned  to  appear  to  testify,  or  to  appear  and  produce 
such  books  as  aforesaid,  neglects  to  appear  or  to  produce  said  books,  he  shall 
be  fined  not  exceeding  one  year  or  both  at  the  discretion  of  the  court,  with  costs 
of  prosecT-ition. 

Section  3180.  Whenever  there  are  in  any  district  any  articles  not  owned  or 
possessed  by  or  under  the  care  or  control  of  any  person  within  said  district 
and  liable  to  be  taxed,  and  of  which  no  list  has  been  transmitted  to  the  col- 
lector as  required  by  law,  the  collector  or  one  of  his  deputies  shall  ent«r  the 
premises  where  such  articles  are  situated,  and  shall  take  such  view  thereof  as 
may  be  necessary  and  make  lists  of  the  same,  according  to  the  form  pre- 
scribed. Said  lists  to  be  subscribed  by  such  collector  or  deputy  collector,  and 
shall  be  taken  as  sufficient  lists  of  such  articles  for  all  purposes. 

Section  3182.  The  Commissioner  of  Internal  Revenue  is  hereby  authorizx^d 
and  required  to  make  the  inquiries,  determinations  and  assessments  of  all 
taxes  and  penalties  ini])osed  by  tiiis  title,  or  accruing  under  any  formal  reve- 
nue act  where  such  taxes  have  not  been  duly  paid  by  stamp  at  the  time  and 
in  the  manner  provided  by  law,  and  shall  certify  a  list  of  such  assessments 
when  made  to  the  proper  collectors  respectively,  who  shall  proceed  to  collect 
and  account  for  tlie  taxes  and  penalties  so  certified.  Whenever  it  is  ascer- 
tained that  any  list  wliich  has  been  or  shall  be  delivered  to  any  collector  is 
imperfect  or  incomplete,  in  consequence  of  the  omission  of  the  name  of  any 
person  liable  to  tax,  or  in  consequence  of  any  omission  or  understatement  or 
undervaluation,  or  false  or  fraudulent  stat<'meiit  contained  in  any  return 
nindc  I)y  :iiiy  jicrsoii  li:ililc  to  tux,  the  ( 'oiiimissioner  of  Internal  l\<'V('iuie  may 
iit  any  time  within  fifteen  months  from  the  time  of  tlie  (!<'livery  of  the  list 
to  the  collector  as  aforesaid,  enter  on  any  montlily  or  special  list  the  name  of 
such  jK'rsoii  so  omitted,  togctlier  with  the  amount  of  tiix  for  which  he  may 
have  Ik'cii  f)r  sliall  become  lialile,  and  ulso  the  nnnie  of  any  such  iierson  in 
respect  to  whose  i  el  urn  as  afon-said  tliiT<'  li;is  licen  or  sliall  lie  any  omission, 
undervnlniition  :ind  understatemr>nt  or  f.ilse  or  fraiidiilent  statement,  together 
with  tlie  .•iinount  for  whicli  sucli  person  niiiy  be  li;ilile  fil)ove  th<>  nmount  for 
which  he  nmv  h;n<-  been  or  shall  lie  ass<'Hsecl  upon  any  return  irinde  us  afore- 
said. ;ind  li"  -li;.ll  (•iTtify  and  return  such  list  to  the  collector  as  required  by 
law.  and   all    provi-ionH  of   law   for   the   ascert ainineni    of   liability   of  any   tax, 


Collection   of  I'ijjekal  Corporation  Tax,  109 

or  the  assessment  or  collection  thereof  sliall  Ik.'  held  to  apply  so  far  as  may  be 
necessary  to  the  proceedings  herein  authorized  and  directed. 

Section  3183.  It  shall  be  the  duty  of  the  collectors  or  their  deputies  in  their 
respective  districts,  and  they  are  authorized  to  collect  the  taxes  imposed  by 
law,  however  the  same  may  be  designated.  And  every  collector  and  deputy 
collector  shall  give  receipts  for  all  sums  collected  by  them. 

Section  3184.  Where  it  is  not  otherwise  provided,  the  collector  shall  in 
p<?r8on  or  by  deputy,  within  ten  days  after  receiving  any  list  of  taxes  from 
the  Commissioner  of  Internal  Revenue,  give  notice  to  each  person  in  writing 
to  pay  any  tax  stated  therein  to  be  left  at  his  dwelling  or  usual  place  of  busi- 
ness, or  to  be  sent  by  mail,  stating  the  amount  of  such  tax  and  demanding 
payment  thereof.  If  such  person  does  not  pay  the  tax  within  ten  days  after 
the  service  or  sending  by  mail  of  such  notice,  it  shall  be  the  duty  of  the  col- 
lector ,or  his  deputy  to  collect  the  said  taxes,  and  the  penalty  of  five  per 
eentum  additional  upon  the  amount  of  taxes  and  interest  at  the  rate  of  one 
per  eentum  a  month. 


Sec.  146.  Rules  and  Regulations  of  the  Secretary  of  the 
Treasury  With  Reference  to  the  Collection,  Remission  and 
Refund  of  the  Federal  Corporation  Tax  Law.  —  Under  section 
321  of  the  United  States  Revised  Statutes  the  commissioner  of 
internal  revenue  is  authorized  to  prepare,  under  the  direction  of 
the  Secretary  of  the  Treasury,  regulations  and  directions  pertain- 
ing to  the  collection  of  internal  revenue.  Under  Treasury  Depart- 
ment Regulations  (T.  D.  1534)  of  date  August  21,  1909,  the 
commissioner  of  internal  revenue,  under  the  direction  of  the  Secre- 
tary of  the  Treasury,  issued  the  following  regulation  relative  to 
the  collection  of  the  federal  corporation  tax : 

Attention  is  specially  called  to  section  38  of  the  Act  of  August  5,  1909, 
imposing  on  certain  corporations,  joint  stock  companies,  associations  and 
insurance  companies  a  special  excise  tax  to  be  paid  annually. 

In  view  of  the  large  number  of  corporations,  companies  and  associations 
subject  to  this  tax,  collectors  of  internal  revenue  will,  on  receipt  of  this  cir- 
cular, at  once  proceed  to  thoroughly  canvass  their  districts,  and  as  soon  as 
possible  furnish  this  office  with  a  list  of  all  such  corporations,  companies  and 
associations  organized  in  their  districts,  setting  forth  the  amount  of  capital 
stock  and  principal  place  of  business  of  each.  Thej^  will  also  furnish  a  separ- 
ate list  of  all  corporations,  companies  and  associations  organized  elsewhere 
(including  such  as  are  organized  under  the  laws  of  a  foreign  country)  having 
their  principal  place  of  business  in  the  district  where  such  list  is  prepared. 
Duplicates  of  such  lists  will  be  made  by  each  collector,  one  copy  thereof  to  be 
retained  in  his  office,  and  the  other,  when  completed,  forwarded  to  the  Com- 
missioner of  Internal  Revenue.  Blanks  to  be  used  in  such  cases  will  be  fur- 
nished collectors;    and,  for  statistical  purposes   and  convenient  reference,   all 


170         Federal  Cokpobation  Tax  Law, 

such  corporations,  companies  and  associations  will  be  classified  and  listed  ac- 
cording to  the  nature  of  the  business  carried  on,  as  follows: 

Class  A.  Financial  and  commercial.  —  Including  banks,  banking  associations, 
trust  companies,  guaranty  and  surety  companies,  title  insurance  companies, 
building  associations  (if  lor  profit)  and  insurance  companies,  not  specifically 
exempt. 

Class  B.  Public  service.  —  Such  as  railroads,  steamboat,  ferryboat  and  stage 
line  companies,  pipe  line,  gas  and  electric  light  companies,  express,  transpor- 
tation and  storage  companies,  telegraph  and  telephone  companies. 

Class  C.  Industrial  and  manufacturing.  —  Such  as  mining,  lumber  and  coke 
companies,  rolling  mills,  foundry  and  machine  shops,  sawmills,  flour,  woolen, 
cotton  and  other  mills,  manufacturers  of  cars,  automobiles,  elevators,  agri- 
cultural implements  and  all  articles  manufactured  wholly  or  in  part  from 
metal,  wood  or  otiier  material,  manufacturers  or  refiners  of  sugar,  molasses, 
sirups  or  other  products,  ice  and  refrigerating  companies,  slaughter  liouse, 
tannery,  packing  or  canning  companies,  etc. 

Class  D.  Mercantile.  —  Including  all  dealers  (not  otherwise  classed  as  pro- 
ducers or  manufacturers)  in  coal,  liimber,  grain,  produce  and  all  goods,  wares 
and  merchandise. 

Class  E.  Miscellaneous.  —  Such  as  architects,  contractors,  hotel,  theatre,  or 
other  companies  or  associations  not  otherwise  classed. 

When  classified  as  above  indicated,  the  names  of  the  various  corporations, 
companies  and  associations  will  be  listed  alphabetically  and  will  be  numbered 
consecutively  (commencing  with  No.  1  in  each  class)  and  in  forwarding  re- 
turns or  papers  subsequently  rendered  or  submitted  by  such  corporations  or 
companies  collectors  will  see  that  the  same  have  placed  thereon  the  designat- 
ing class  letter  and  number  corresponding  with  those  noted  on  the  lists  herein 
required  to  be  furnished. 

Special  instructions  regarding  the  form  of  return  to  be  rendered  by  such 
cor})orations,  and  as  to  the  preparation  or  assessment  lists  by  collectors,  will 
be  issued  in  due  season. 

The  tax  asspssed  under  the  provisions  of  the  Federal  Corpora- 
tion Tax  Law  will  be  receipted  for  as  in  the  ease  of  other  assessed 
taxes.  Unless  ])aid  within  the  time  fixed  by  the  statute,  notice  and 
demand  should  be  at  once  issued,  and  in  case  of  nonpayment,  dis- 
trnint  proceodinfijs  slionld  bo  instituted  witliout  delay. 

It  slidiild  be  noted  tli:it  all  rcirubitions  issued  by  the  Secretary 
of  the  Treasury  with  reference  io  the  internal  revenue  and  for 
\\n'.  ^ovenmicnt  of  the  officers  of  the  revenue  department  shall 
have  tlie  force  and  cUccI  of  hiw  and  are  as  bindin<!;  as  if  incor- 
porated in  the  statute  law  of  the  United  States.  (Stegall  v.  Thur- 
Miiin,  175  Fed.  Ilcp.  813.) 


CouET  Procedure.  171 


CHAPTER  X. 

COURT    PROCEDURE. 

Sec.  147.  General  Remarks  Thereon.  —  The  same  remedies 
are  open  to  the  companies  against  whom  a  tax  is  imposed  under 
the  provisions  of  the  Federal  Corporation  Tax  Law  as  are  appli- 
cable generally  to  parties  against  whom  other  internal  revenue 
taxes  are  assessed.  This  for  the  reason  that  the  Federal  Corpora- 
tion Tax  Law  (section  8,  lines  15-24)  specifically  provides  that 
all  laws  of  the  United  States  relating  to  the  collection,  remission 
and  refund  of  internal  revenue  taxes,  so  far  as  applicable  to  and 
not  inconsistent  with  the  provisions  of  the  Federal  Corporation 
Tax  Act  are  extended  and  made  applicable  thereto. 

Sec.  148.  Remedy  by  Appeal  to  the  Commissioner  of  In- 
ternal Revenue.  —  Section  3220  of  the  United  States  Revised 
Statutes  provides  as  follows : 

The  Commissioner  of  Internal  Revenue,  subject  to  regulations  prescribed  by 
the  Secretary  of  the  Treasury,  is  authorized,  on  appeal  to  him  made,  to  remit, 
refund  and  pay  back  all  taxes  erroneously  or  illegally  assessed  or  collected 
and  all  penalties  collected  without  authority,  and  all  taxes  that  appear  to  be 
unjustly  assessed  or  excessive  in  amount,  or  in  any  manner  wrongfully  col- 
lected; also  to  repay  to  any  collector  or  deputy  collector  the  full  amount  of 
such  sums  of  money  as  may  be  recovered  against  him  in  any  court  for  any 
internal  taxea  collected  by  him,  with  the  costs  and  expenses  of  suit;  also  all 
damages  and  costs  recovered  against  any  assessor,  assistant  assessor,  collector, 
deputy  collector  or  inspector  in  any  suit  brought  against  him  by  reason  of 
anything  done  in  tiie  due  performance  of  his  official  duty;  Provided,  that  where 
a  second  assessment  is  made  in  case  of  a  list,  statement  or  return,  whicli,  in 
the  opinion  of  the  collector  or  deputy  collector  was  false  or  fraudulent  or  con- 
tained any  understatement  or  undervaluation,  and  such  assessment  shall  not 
be  remitted,  nor  shall  taxes  collected  under  such  assessment  be  refunded  or 
paid  back  unless  it  is  provld  that  said  list,  statement  or  return  was  not  false 
or  fraudulent,  and  did  not  contain  any  understatement  or  imdervaluation. 


172  Fedebal  Cokpokation  Tax  Law. 

It  should  be  further  noted  that  all  applications  for  refund  of 
taxes  erroneously  charged  or  illegally  collected  against  a  corpora- 
tion, must  be  made  to  the  commissioner  of  internal  revenue  within 
two  years  from  the  date  of  such  collection.  (U.  S.  R.  S.,  §  2228 ; 
see  generally  Cheeseborough  v.  U.  S.,  192  U.  S.  253,  24  Sup. 
Ct.  Rep.  262.) 

Sec.  149.  What  Courts  Have  Power  to  Hear  Appeals  From 
the  Levying  of  the  Tax.  —  The  basis  upon  which  the  federal 
corporation  tax  seems  to  have  been  laid  is  along  the  line  of  con- 
fining the  right  of  appeal  to  the  executive  department  having 
charge  of  the  assessment  and  collection  of  the  tax.  (Taylor  v. 
Secor,  92  U.  S.  575,  23  L.  E.  663 ;  Cheatham  v.  Noi-well,  92  U.  S. 
85.)  So  it  may  be  said  that  no  specific  right  to  appeal  to  the 
courts  for  redress  either  from  an  erroneous  assessment  or  for  an 
illegal  assessment  is  provided  by  the  federal  corporation  tax. 

Sec.  150.  Remedy  by  Injunction.  —  Section  3224  of  the 
United  States  Revised  Statutes  provides  that  no  suit  for  the  pur- 
pose of  restraining  the  assessment  or  collection  of  any  tax  shall 
be  maintained  in  any  court.  See  Snyder  v.  Marks,  109  U.  S. 
189,  3  Sup.  Ct.  Rep.  157. 

Neither  a  federal  or  state  court  has  any  power  to  stay  the  assess- 
ment or  collection  of  any  tax.  (Boeckler  Lumber  Co.  v.  Hay  ward, 
20  Fed.  422.)  The  executive  branch  of  the  federal  government 
cannot  be  interfered  with  in  this  manner.  (Moore  v.  Miller,  5 
App.  Cases  D.  C.  413.) 

Sec.  151.  Remedy  by  Mandamus. —  Tf  relief  by  mandamus  is 
to  be  sought  it  must  Ixi  granted  by  a  federal  court,  as  no  State 
court  has  power  to  issue  such  writ  to  any  officer  in  tlic  employ  of 
tlic  fc<k'ra]  govoniiiictit.  (Mc('lung  r.  Sillimaii,  6  Wheat.  598.) 
Even  I'liitcd  States  courts  haxc  no  general  ])o\v(m*  to  issue  the  writ 
of  im;iii(1:iiiiiis.  The  power,  where  it  exists,  is  generally  treated  as 
one  growing  out  of  tlieir  .ippelhile  jurisdiction.  See  Davenport 
r.  C\)niity  of  Dodge,  lOf)  C.  S.  237;  Marherrv  r.  Madison,  1 
Criiii'h,   i:!7.     Ordinarily  resort  must  1h'  had  to  the  courts  estab- 


Court  riiocEDURE.  173 

lished  by  Congress  in  the  District  of  Columbia,  wherein  the  office 
of  the  commissioner  of  internal  revenue  is  located,  and  wlierein 
the  commissioner  must  reside.  (U.  S.  v.  Black,  128  U.  S.  40,  9 
Sup.  Ct.  Kep.  12;  Decatur  v.  Paulding,  14  Peters  497.) 


Sec.  152.  Remedy  by  Action  Against  the  Officer  for  Levies 
Made  by  Him  In  Connection  With  the  Enforcement  of  the 
Tax.  —  If  a  levy  is  made  against  a  company  for  the  collection  of 
a  tax  illegally  assessed,  or  if  the  collection  is  made  in  an  illegal 
manner,  the  officer  making  such  levy  is  liable  in  damages  in  some 
property  fiction,  such  as  conversion  or  trespass.  These  actions 
may  be  maintained  without  reference  to  the  fact  that  the  plaintiff 
has  appealed  to  the  commissioner  of  internal  revenue  for  redress. 
Erskine  v.  Hohnbach,  14  Wall.  613 ;  Stutsman  Co.  v.  Wallace, 
142  U.  S.  293. 

Note.  —  A  cause  of  action  accrues  against  a  collector  at  the  time  the  Com- 
missioner renders  his  decision  and  stands  upon  the  primary  enactment  of  this 
statute,  requiring  that  suit  should  be  brought  within  two  years  next  after 
the  cause  of  action  accrued.  The  provision  of  the  proviso  that  action  may  be 
brought  on  any  claim  pending  before  the  Commissioner  within  one  year  after 
his  decision,  does  not  apply  to  any  claim  presented  to  the  Commissioner  since 
the  enactment  of  the  statute.  Wright  v.  Blakslee,  101  U.  S.  174.  See,  also, 
Cheathran  v.  U.  S.,  92  U.  S  8.5.  In  which  case  the  court  stated  that  the 
period  of  limitation  begins  at  the  time  of  the  decision  of  the  Commissioner, 
and  not  at  the  time  thereafter  that  payment  of  the  tax  may  be  made.  See 
16  Op.  Atty.-Gen.  249. 

The  collector  cannot  be  sued  unless  the  taxpayer  has  applied  for  re- 
lief to  the  Commissioner,  within  the  time  and  in  the  manner  pointed  out  by 
law,  and  relief  has  been  denied  him.  Kings  Co.  Savings  Institution  v.  Blair, 
116  U.  S.  200. 

After  the  recovery  of  a  judgment  against  a  collector  of  internal  revenue  for 
damages  and  costs  for  the  wrongful  seizure  of  property,  if  the  collector  appeals 
ko  the  Commissioner  for  the  payment  of  the  judgment,  it  is  not  improper  to 
consider  the  application  as  one  for  the  payment  to  the  plaintiff  on  the  judg- 
ment. As  the  first  clause  provides  for  the  refunding  of  taxes,  and  penalties  to 
the  person  from  whom  the  taxes  operates  to  the  person  from  whom  they  are 
collected,  it  is  not  common  with  such  provision  that  the  moneys  and  dam- 
ages to  be  repaid  under  the  second  and  third  clauses  should  be.  paid  to  th^^ 
person  who  recovers  the  judgment  for  them  if  the  judgment  is  not  paid  by  the 
defendant.  U.  S.  v.  Frerichs,  124  U.  S.  315.  See,  also,  Nixon  v.  U.  S..  18  Ct, 
CI.  456. 


174  Federat.  Corporation  Tax  Law. 

Sec.  153.  Action  to  Recover  Taxes  Paid  Under  Protest. — 

The  easiest  and  most  effective  way  to  test  the  legality  of  any  tax 
assessed  under  the  Federal  Corporation  Tax  Law  is  for  the  com- 
pany against  whom  the  tax  is  assessed  to  pay  the  full  amount  of 
the  tax  under  protest,  and  then  bring  an  action  for  money  paid 
out  and  received  against  the  collector  to  recover  back  the  amount 
so  paid.     (Elliott  v.  Swartout,  10  Pet.  137;  Wright  v.  Blakeslee, 
110  LT.  S.  174.)     However,  in  this  connection  in  order  to  make 
such  a  line  of  procedure  effective,  the  payment  of  the  tax  must  have 
been  made  under  threat  of  proceedings  by  the  commissioner  to 
enforce  the  payment  of  the  tax.     ( Cheeseborough  v.  U.  S.,  192  U. 
S.  253.)     And  provided  further,  that  before  the  commencement  of 
the  action  the  appeal  must  have  been  taken  to  the  commissioner 
of  internal  revenue  petitioning  him  to  repay  the  amount  of  the 
tax  so  paid  under  protest.     (See  U.  S.  Revised  Statutes,  §  3226; 
Hubbard  v.  Collector,  12  Wall.  1 ;  Clinkenbeard  v.  U.  S.,  21  Wall. 
65.)     The  remedy  is,  however,  not  complete  and  satisfactory  ex- 
cept  in   those  cases  where   the   payment   is  wholly  void.      (See 
Cheeseborough  v.  United  States,  192  U.  S.  253,  262,  263.) 

Where  an  excessive  tax  is  paid  under  a  mistake  of  law  and  with- 
out protest,  the  payment  is  voluntary,  and  there  can  be  no  recovery. 
(Giilbenskian  v.  U.  S.,  75  Fed.  860  (C.  C.  S.  D.  N.  Y.,  Dec.  28, 
1909)  ;  Robertson  v.  Bradbury,  132  U.  S.  491;  Elliott  v.  Swarth- 
out,  10  Pet.  137;  Railroad  Co.  v.  Commissioner,  98  U.  S.  341; 
Rodick  V.  Hutchins,  95  U.  S.  210 ;  Little  v.  Bowers,  134  U.  S. 
547.) 


APPENDIXES 


APPENDIX  A. 

Text  of  the  Corporation  Tax  Enactment,  Constituting  Section 
38  of  the  Act  of  Congress,  approved  April  5th,  1909,  found  in 
the  United  States  Statutes,  61st  Congress,  1909,  First  Session, 
pages  11,  112-118. 

CHAPTER    VI. 

An  Act  to  Provide  Eevenue,  Equalize  Duties  and  encourage  the 
industries  of  the  United  States,  and  for  other  purposes. 

Be  it  enacted  by  the  Senate  and  House  of  Representatives  of 
the  United  States  of  America  in  Congress  assembled. 

(Here  follow  the  first  37  sections  of  the  foregoing  Act.) 

Section  38.  (For  convenience  herein  the  first  subdivision  of 
section  38  is  numbered  as  section  1.  The  other  sections  running 
from  2  to  8  inclusive,  are  found  so  numbered  in  the  Act  itself.) 

1  Section   1.   That  every  corporation,  joint  stock  company,  or 

2  association,  organized  for  profit,  and  having  a  capital  stock 

3  represented  by  shares,  and  every  insurance  company,  now  or 

4  hereafter  organized  under  the  laws  of  the  United  States  or  of 

5  any  State  or  Territory  of  the  United  States,  or  under  the  acts 

6  of  Congress  applicable  to  Alaska  or  the  District  of  Columbia, 

7  or  now  or  hereafter  organized  under  the  laws  of  any  foreign 

8  country  and  engaged  in  business  in  any  State  or  Territory  of 

9  the  United  States,  or  in  Alaska  or  in  the  District  of  Columbia, 

10  shall  be  subject  to  pay   annually   a   special  excise  tax  with 

11  respect  to  the  carrying  on  or  doing  business  by  such  corpora- 

12  tion,  joint  stock  company  or  association,  or  insurance  company, 

13  equivalent  to  one  per  centum  upon  the  entire  net  income  over 

14  and  above  five  thousand  dollars,  received  by  it  from  all  sources 

15  during  such   year,   exclusive   of    amounts   received   by   it    as 

[175] 


1T6  Fedekal  Corpoeation  Tax  Law. 

16  dividends  upon  stock  of  other  corporations,  joint  stock  com- 

17  panies,  or  associations,  or  insurance  companies,  subject  to  the 

18  tax  hereby  imposed;  or  if  organized  under  the  laws  of  any 

19  foreign  country,  upon  the  amount  of  net  income  over  and  above 

20  five  thousand  dollars  received  by  it  from  business  transacted  and 

21  capital  invested  within  the  United  States  and  its  Territories, 

22  Alaska  and   the  District  of  Columbia  during  such  year,  ex- 

23  elusive  of  amounts  so  received  by  it  as  dividends  upon  stock  of 

24  other  corporations,  joint  stock  companies  or  associations  or 

25  insurance  companies,  subject  to  the  tax  hereby  imposed :     Pro- 

26  vided,  however  That  nothing  in  this  section  contained  shall 

27  apply  to  labor,  agricultural  or  horticultural  organizations,  or 

28  to  fraternal  beneficiary  societies,  orders  or  associations  opera t- 

29  ing  under  the  lodge  system,  and  providing  for  the  payment  of 

30  life,  sick,  accident,  and  other  benefits  to  the  members  of  such 

31  societies,  orders  or  associations,  and  dependants  of  such  mem- 

32  bers,  nor  to  domestic  building  and  loan  associations,  organized 

33  and  operated  exclusively  for  the  mutual  benefit  of  their  mem- 

34  bers,  nor  to  any  corporation  or  association  organized  and  ope- 

35  rated  exclusively  for  religious,  charitable  or  educational  pur- 

36  poses,  no  part  of  the  net  income  of  which  inures  to  the  benefit 

37  of  any  private  stockholder  or  individual. 

1  Second.   Such  net  income  shall  be  ascertained  by  deducting 

2  from  the  gross  amount  of  the  income  of  such  corporation,  joint 

3  stock  company  or  association,  or  insurance  company,  received 

4  within  the  year  from  all  sources,  (first)  all  the  ordinary  and 

5  necessary  expenses  actually  paid  within  the  year  out  of  income 

6  in  the  maintenance  and  oj)eration  of  its  business  and  propcr- 

7  ties,   including  all  charges  such   as   rentals  or  franchise  pay- 

8  mcnts,  required  to  be  made  as  a  condition  to  the  continued  use 

9  or  possession  of  property;  (second)  all  losses  actually  sustained 

10  within  tlir-  yiK\r  and  not  compensated  by  insurance  or  other- 
1  1  wiso,  including  a  rousonnble  allowance  for  do]>reciation  of 
\J.  property,  if  any,  and  in  tlio  case  of  insurance  comj)anics  the 
I -'5  sums  other  than  dividends,  paid  within  the  year  on  policy  and 

11  :itiiinity  contracts  ami  the  net  addition,  if  any,  required  hv  Imw 
1.")  to  hi'  iiindc  within  the  year  to  reserve  funds;  (third)  interest 


Appendixes.  177 

16  actually  paid  within  the  year  on  its  bonded  or  other  indebted- 

17  ness  to  an  amount  of  such  bonded  and  other  indebtedness  not 

18  exceeding  the  paid  up  capital  stock  of  such  corporation,  joint 

19  stock  company  or  association,  or  insurance  company,  outstand- 

20  ing  at  the  close  of  the  year,  and  in  the  case  of  a  bank,  banking 

21  association,  or  trust  company,  all  interest  actually  paid  by  it 

22  within   the  year  on  deposits;    (fourth)    all   sums  paid  by  it 

23  within  the  year  for  taxes  imposed  under  the  authority  of  the 

24  United  States  or  of  any  State  or  Territory  thereof,  or  imposed 

25  by  the  government  of  any  foreign  country  as  a  condition  to 

26  carrying  on  business  therein;   (fifth)  all  amounts  received  by 

27  it  within  the  year  as  dividends  upon  stock  of  other  corpora- 

28  tions,  joint  stock  companies  or  associations,  or  insurance  com- 

29  panics,  subject  to  the  tax  hereby  imposed.     Prov*ided,  That  in 

30  the  case  of  a  corporation,  joint  stock  company  or  association, 

31  or  insurance  company,  organized  under  the  laws  of  a  foreign 

32  country,  such  net  income  shall  be  ascertained  by  deducting 

33  from  the  gross  amount  of  its  income  received  within  the  year 

34  from    business    transacted    and    capital    invested    within    the 

35  United  States  and  any  of  its  Territories,  Alaska  and  the  Dis- 

36  trict  of  Columbia,    (first)   all  the  ordinary  and  necessary  ex- 

37  penses  actually  paid  within  the  year  out  of  earnings  in  the 

38  maintenance  and  operation  of  its  business  and  property  within 

39  the  United  States  and  its  territories,  Alaska,  and  the  District 

40  of  Columbia  including  all  charges,  such  as  rentals,  or  franchise 

41  payments  required  to  be  made  as  a  condition  to  the  continued 

42  use  or  possession  of  property;  (second)  all  losses  actually  sus- 

43  tained  within  the  year  in  business  conducted  by  it  w^ithin  the 

44  United   States  or  its  Territories,  Alaska,   or  the  District  of 

45  Columbia,  not  compensated  by  insurance  or  otherw^ise,  includ- 

46  ing  a  reasonable  allowance  for  depreciation  of  property,  if  any, 

47  and  in  the  case  of  insurance  companies  the  sums  other  than 

48  dividends,  paid  wnthin  the  year  on  policy  and  annuity  con- 

49  tracts  and   the  net  addition,   if  any,   required  by  law   to  be 

50  made  within  the  year  to  reser^^e  funds ;  (third)  interest  actually 

51  paid  within  the  year  on  its  bonded  or  other  indebtedness  to  an 

52  amount  of  such  bonded  and  other  indebtedness,  not  exceeding 

53  the  proportion  of  its  paid  up  capital  stock  outstanding  at  the 

Fed.  Corp.  Tax  —  12 


178  Federal  Corporation   Tax    Law. 

54  close  of  the  year  which  the  gross  amount  of  its  income  for  the 

55  year   from   business   transacted    and    capital    invested   within 

56  the  United  States  and  any  of  its  Territories,  Alaska,  and  the 

57  District  of  Columbia  bears  to  the  gross  amount  of  its  income 

58  derived  from  all  sources  within  and  w^ithout  the  United  States; 

59  (fourth)   the  sums  paid  by  it  within  the  year  for  taxes  im- 

60  posed  under  the  authority  of  the  United  States,  or  of  any  State 

61  or  Territory  thereof;  (tifth)  all  amounts  received  by  it  within 

62  the  year  as  dividends  upon  stock  of  other  corporations,  joint 

63  stock  companies,  or  associations  and  insurance  companies,  sub- 

64  ject   to  the  tax  hereby  imposed.     In  the  case  of  assessment 

65  insurance  companies  the  actual  deposit  of  sums  with  State  or 

66  Territorial  othcers,  pursuant  to  law,  as  additions  to  guaranty 

67  or  reserve  funds  shall  be  treated  as  being  payments  required 

68  by  law  to  reserve  funds. 

1  Third.  There  shall  be  deducted  from  the  amount  of  the  net 

2  income  of  each  of  such  corporations,  joint  stock  companies,  or 

3  associations,  or  insurance  companies,  ascertained  as  provided 

4  in  the  foregoing  paragraphs  of  this  section,  the  sum  of  five 

5  thousand   dollars,   and   said    tax   shall   Ik^   computed   upon   the 

6  remainder  of  said  net  income  of  sucn  corporation,  joint  stock 

7  company  or  association,  or  insurance  com])any,  for  the  year 

8  ending  December  thirty-first,  nineteen  hundred  and  nine,  and 

9  for  each  calendar  year  thereafter;  and  on  or  before  the  first 

10  day  of  IVIarch,  nineteen  hundred  and  ten;  and  the  first  day  of 

11  March    in   each  year  thereafter,   a   true  and   accurate  return 

12  under  oatli  or  nffimiatidn   of  its  jH'csident,  vice  president,  or 

13  ntlior  priii<i[i;il  ofliccr,  and  its  treasurer  or  assistant  treasurer, 

14  shall  \xt  made  by  cacli  of  the  corjxjrations,  joint  stock  companies 

15  or  associations,  and    insiirnnce  companies,  subject  to  the   tax 

16  iiny)os('d  by  this  section,  to  llic  collector  of  intcnial  revenue  for 

17  tli(;  district  in  which  such  corpor;!! ion,  joint  stock  company  or 

18  {issociat iim,  or   insurance  coni|»;iny,   lias    its   principal   ])lace  of 
I'.t  hiisiness,  or,  in   tli<'  c;ise  of   a  corpopiit  ion,   joint   stock  company 

20  or  association  or  insuraiK-e  companv,  organi/.(>d  under  the  laws 

21  of  a   foreign  country,  in  the  jilace  where  its  |irincipal  hnsiness 

22  is  carried  on  within  the  United  States,  in  such  form  as  the 


Appendixes.  179 

28  Commissioner  of  Internal  Revenue,  with  the  approval  of  the 

24  Secretary  of  the  Treasury,  shall  prescribe,  setting  forth  (first) 

25  the  total  amount  of  the  paid  up  capital  stock  of  such  corpora- 

26  tion,  joint  stock  company  or  association,  or  insurance  company, 

27  outstanding  at  the  close  of  the  year;  (second)  the  total  amount 

28  of  the  bonded  and  other  indebtedness  of  such  corporation  joint 

29  stock  company  or  association,  or  insurance  comany  at  the  close 

30  of  the  year;  (third)  the  gross  amount  of  the  income  of  such 

31  corporation  joint  stock  company  or  association  or  insurance 

32  company,  received  during  such  year  from  all  sources,  and  if 

33  organized  under  the  laws  of  a  foreign  country  the  gross  amouni 

34  of  its  income  received  within  the  year  from  business  transacted 

35  and  capital  invested  within  the  United  States  and  any  of  its 

36  Territories,  Alaska,  and  the  District  of  Columbia ;   also  the 

37  amount  received  by  such  corporation,  joint  stock  company  or 

38  association  or  insurance  company,  within  the  year  by  way  of 

39  dividends  upon  stock  of  other  corporations,  joint  stock  com- 

40  panics  or  associations,  or  insurance  companies,  subject  to  the 

41  tax  imposed  by  this  section;  (fourth)  the  total  amount  of  all 

42  the  ordinary  and  necessary  expenses  actually  paid  out  of  eam- 

43  ings  in  the  maintenance  and  operation  of  the  business   and 

44  properties  of  such  corporation,  joint  stock  company  or  associa- 

45  tion,  or  insurance  company,  within  the  year,  stating  separately 

46  all  charges,  such  as  rentals  or  franchise  payments  required  to 

47  be  made  as  a  condition  to  and  continued  use  or  possession  of 

48  property,  and  if  organized  under  the  laws  of  a  foreign  country, 

49  the  amount  so  paid  in  the  maintenance  and  operation  of  its 

50  business  within  the  United  States  and  its  Territories,  Alaska, 

51  and  the  District  of  Columbia;  (fifth)  the  total  amount  of  all 

52  losses  actually  sustained  during  the  year  and  not  compensated 

53  by   insurance  or   otherwise,   stating   separately   any   amounts 

54  allowed  for  depreciation  of  property,  and  in  the  case  of  insur- 

55  ance  companies  the  sums  other  than  dividends  paid  within  the 

56  year  on  policy  and  annuity  contracts  and  the  net  addition,  if 

57  any,  required  by  law  to  be  made  within  the  year  to  reserve 

58  funds;  and  in  the  case  of  a  corporation,  joint  stock  company 

59  or  association  or  insurance  company,  organized  under  the  laws 

60  of  a  foreign  country,  all  losses  actually  sustained  by  it  during 


ISO  Federal  Corpokatiox  Tax  Law. 

61  the  year  in  business  conducted  by  it  within  the  United  States 

62  or  its  Territories,  Alaska  and  the  District  of  Columbia,  not 

63  compensated  by  insurance  or  otherwise,  stating  separately  any 

64  amounts  allowed  for  depreciation  of  property,  and  in  the  case 

65  of  insurance  companies  the  sums  other  than  dividends,  paid 

66  within  the  year  on  policy  and  annuity  contracts  and  the  net 

67  addition,  if  any,  required  by  law,  to  be  made  within  the  year 

68  to  reserve  fund;  (sixth)  the  amount  of  interest  actually  paid 

69  within   the  year  on  its  bonded  or  other  indebtedness  to  an 

70  amount  of  such  bonded  and  other  indebtedness  not  exceeding 

71  the  paid  up  capital  stock  of  such  corporation,  joint  stock  com- 

72  pany  or  association,  or  insurance  company,  outstanding  at  the 

73  close  of  the  year,  and  in  the  case  of  a  bank,  banking  association 

74  or  trust  company,  stating  separately  all  interest   paid  by  it 

75  within  the  year  on  deposits ;  or  in  case  of  a  corjDoration,  joint 

76  stock  company  or  association  or  insurance  company,  organized 

77  under  the  laws  of  a  foreign  country,  interest  so  paid  on  its 

78  bonded  or  other  indebtedness  to  an  amount  of  such  bonded  and 

79  other  indebtedness  not  exceeding  the  proportion  of  its  paid-up 

80  capital  stock  outstanding  at  the  close  of  the  year,  which  the 

81  gross  amount  of  its  income  for  the  year  from  business  trans- 

82  acted  and  capital  invested  within  the  United  States  and  any  of 

83  its  Territories,  Alaska,  and  the  District  of  Columbia,  bears  to 

84  the  gross  amount  of  its  income  derived  from  all  sources  within 

85  and  without  the  United  States;  (seventh)  the  amount  paid  by 

86  it  within  the  year  for  taxes  imposed  under  the  authority  of  the 

87  United  States  or  any  State  or  Territory  thereof,  and  separately 

88  tlic  iiiiKiiitit  so  paid  by  it  for  taxes  imposed  by  the  Government 
80  of  any  foreign  country  as  a  condition  to  carrying  on  business 
00  therein;  (eiglith)  tlie  net  income  of  such  corjwration,  joint 
91  stock   coini)any   or   association,    or    insurance   company,   after 

02  making  tiio  deductions  in   this  section   authorized.      All  such 

03  returns  shall  as  received  Ik-  transmitted  forthwith  by  the  Col- 
94  lector  to  the  Commissioner  of  Interniil  Tixivenue. 

1  Fourth.    Whenever  evidence   shall    be    ])roduced    before    the 

2  Commissioner  of  Internal  Itevcnuc  which  in  the  opinion  of  the 

3  Commissioner  justifies  the  belief  that  the  return  iiuide  by  any 


Appendixes.  181 

4  corporation,  joint  stock  company  or  association,  or  insurance 

5  company,  is  incorrect,  or  whenever  any  collector  shall  report 

6  to  the  Commissioner  of  Internal  Revenue  that  any  corporation, 

7  joint  stock  company  or  association,  or  insurance  company  has 

8  failed  to  make  a  return  as  required  by  law,  the  Commissioner 

9  of  Internal  Revenue  may  require  from  the  corporation,  joint 

10  stock  company  or  association,  or  insurance  company  making 

11  such  return   such  further  information  with   reference  to  its 

12  capital,  income,  losses  and  expenditures  as  he  may  deem  ex- 

13  pedient;  and  the  Commissioner  of  Internal  Revenue,  for  the 

14  purpose  of  ascertaining  the  correctness  of  such  return  or  for 

15  the  purpose  of  making  a  return  where  none  has  been  made,  is 

16  hereby  authorized  by  any  regularly  appointed  revenue  agent 

17  specially  designated  by  him  for  that  purpose,  to  examine  any 

18  books  and  papers  bearing  upon  the  matters  required  to  be  in- 

19  eluded  in  the  return  of  such  corporation,  joint  stock  company 

20  or  association,  or  insurance  company,  and  to  require  the  attend- 

21  ance  of  any  officer  or  employee  of  such  corporation,  joint  stock 

22  company  or  association,  or  insurance  company,  and  to  take  his 

23  testimony  with  reference  to  the  matter  required  by  law  to  be 

24  included  in  such  return,  with  power  to  administer  oaths  to 

25  such  person  or  persons;   and  the  Commissioner  of  Internal 

26  Revenue  may  also  invoke  the  aid  of  any  court  of  the  United 

27  States  having  jurisdiction  to  require  the  attendance  of  such 

28  officers  or  employees  and  the  production  of  such  books  and 

29  papers.     Upon  the  information  so  acquired  the  Commissioner 

30  of  Internal  Revenue  may  amend  any  return  or  make  a  return 

31  where  none  has  been  made.      All  proceedings  taken  by  the 

32  Commissioner  of  Internal  Revenue  under  the  provisions  of 

33  this  section  shall  be  subject  to  the  approval  of  the  Secretary  of 

34  the  Treasury. 

1  Fifth.  All  returns  shall  be  retained  by  the  Commissioner  of 

2  Internal  Revenue  who  shall  make  assessments  thereon ;  and  in 

3  case  of  any  return  made  with  false  or  fraudulent  intent,  he 

4  shall  add  one  hundred  per  centum  of  such  tax,  and  in  case  of  a 

5  refusal  or  neglect  to  make  a  return  or  to  verify  the  same  as 

6  aforesaid  he  shall  add  fifty  per  centum  of  such  tax.     In  case  of 


182  Federal  Corporation  Tax  Law. 

7  neglect  occasioned   by   the  sickness   or   absence  of  an  officer 

8  of  such  corporation,  joint  stock  company  or  association,  or 

9  insurance  company,  required  to  make  said  return,  or  for  other 

10  sufficient  reason,  the  collector  may  allow  such  further  time  for 

11  making  and  delivering  such  return  as  he  may  deem  necessary, 

12  not  exceeding  thirty  days.     The  amount  so  added  to  the  tax 

13  shall  be  collected  at  the  same  time  and  in  the  same  manner  as 

14  the  tax  originally  assessed,  unless  the  refusal,  neglect  or  falsity 

15  is  discovered,   after  the  date  for  payment  of  said  taxes,  in 

16  which  case  the  amount  so  added  shall  be  paid  by  the  delinquent 

17  corporation,  joint  stock  company  or  association,  or  insurance 

18  company,  immediately  upon  notice  given  by  the  collector.     All 

19  assessments  shall  be  made  and  the  several  corporations,  joint 

20  stock  companies  or  associations  or  insurance  companies  shall 

21  be  notified  of  the  amount  for  which  they  are  respectively  liable 

22  on  or  before  the  first  day  of  June  of  each  successive  year,  and 

23  said  assessments  shall  be  paid  on  or  before  the  thirtieth  day  of 

24  June,  except  in  cases  of  refusal  or  neglect  to  make  such  return, 

25  and  in  cases  of  false  or  fraudulent  returns,  in  which  cases  the 

26  Commissioner  of  Internal  Revenue  shall,  upon  the  discovery 

27  thereof,  at  any  time  within  three  years  after  said  return  is  due, 

28  make  a  return  upon  information  obtained  as  above  provided 

29  for,  and  the  assessment  made  by  the  Commissioner  of  Internal 

30  Revenue  thereon  shall  1k'  paid  by  such  corporation,  joint  stock 

31  comj)anv   or   association    or    insurance   company    immediately 

32  upon  notification  of  the  amount  of  such  assessment;  and  to  any 

33  sum  or  sums  due  and   unpaid  after  the  thirtieth  day  of  June 

34  in  any  year,  and  for  ten  days  after  notice  and  demand  thereof 

35  by  the  collector  tiiere  shall  be  added  the  sum  of  five  per  centum 

36  on   the  amount  of  tax  nnj)aid   and   interest  at  the  rate  of  one 

37  per  ccmtum  per  month  upon  said  tax  from  the  time  the  same 

38  becomes  due. 


1  Sixth.    When  the  assessment  shall  be  made,  as  provided  in 

2  this  section,  tlie  returns,  together  with  any  corrections  thereof 

3  which  may  have  liecn  made  1»\'  the  couiinissioner,  shall  be  filed 

4  in  the  oilice  of  ihe  ( 'oniuiissioner  of  Internal  I{(!venue  and  shall 
r>  constitute  public  records  and  be  open  to  insjx'ction  as  such. 


Appendixes.  183 

1  Seventh.    It   shall   be    unlawful    for   any   collector,    deputy 

2  collector,  agent,  clerk  or  other  officer  or  employee  of  the  United 

3  States  to  divulge  or  make  known  in  any  manner  whatever  not 

4  provided  by  law  to  any  jK^rson  any  information  obtained  b}" 

5  him  in  the  discharge  of  his  official  duty,  or  to  divulge  or  make 

6  known  in  any  manner  not  provided  by  law  any  document  re- 

7  ceived,    evidence   taken    or   report   made   under    this    section, 

8  except  upon  the  special  direction  of  the  President ;  and  any 

9  offense  against  the  foregoing  provision  shall  be  a  misdemeanor 

10  and  be  punished  by  a  fine  not  exceeding  one  thousand  dollars. 

1 1  or  by  imprisonment  not  exceeding  one  year,  or  both,  at  the 

12  discretion  of  the  court. 

1  Eighth.    If  any  of  the  corporations,  joint  stock  companies 

2  or  associations  or  insurance  companies  aforesaid,  shall  refuse 

3  or  neglect  to  make  a  return  at  the  time  or  times  hereinbefore 

4  specified  in  each  year,  or  shall  render  a  false  or  fraudulent 
T)  return,  such  corporation,  joint  stock  company  or  association,  or 

6  insurance  company,  shall  be  liable  to  a  penalty  of  not  less  than 

7  one  thousand  dollars  and  not  exceeding  ten  thousand  dollars. 

8  Any  person   authorized  by   law  to  make,   render,   sign   or 

9  verify  any  return  who  makes  any  false  or  fraudulent  return, 

10  or  statement  required  by   this  section  to  be  made,   shall  be 

11  guilty  of  a  misdemeanor,  and  shall  be  fined  not  exceeding  one 

12  thousand  dollars,  or  be  imprisoned  not  exceeding  one  year  or 

13  both,  at  the  discretion  of  the  court,  with  the  costs  of  prosecu- 

14  tion. 

15  All  laws  relating  to  the  collection,  remission,  and  refund  of 

16  internal-revenue  taxes,  so  far  as  applicable  to  and  not  incon- 

17  sistent  with  the  provisions  of  this  section,  are  hereby  extended 

18  and  made  applicable  to  the  tax  imposed  by  this  section. 

19  Jurisdiction  is  hereby  conferred  upon  the  circuit  and  dis- 

20  trict  courts  of  the  United  States  for  the  district  within  which 

21  any  person  summoned  under  this  section  to  appear  to  testify 

22  or  to  produce  books,  as  aforesaid,  shall  reside,  to  compel  such 

23  attendance,  production  of  books  and  testimony  by  appropriate 

24  process. 


184        Pedeeal  Corpokation  Tax  Law. 


APPENDIX  B. 

(T.  D.  1534.) 

TREASUEY  DEPARTMENT  REGULATION. 

Special  Excise  Tax. 

Treasury  DBa»ARTMENT, 
Office  of  Commissioner  of  Internal  Revenue, 

Washington,  D.  C,  August  21,  1909. 
To  collectors  of  internal  revenue: 

Attention  is  especially  called  to  section  38  of  the  act  of  August  5,  1909, 
imposing  on  certain  corporations,  joint  stock  companies,  associations,  and 
insurance  companies  a  special  excise  tax  to  be  paid  annually. 

In  view  of  the  large  number  of  corporations,  companies,  and  association? 
subject  to  this  tax,  collectors  of  internal  revenue  will,  on  receipt  of  this  cir- 
cular, at  once  proceed  to  thoroughly  canvass  their  districts,  and  as  soon  as 
possible  furnish  this  office  with  a  list  of  all  such  corporations,  companies,  and 
associations  organized  in  their  districts,  setting  forth  the  amount  of  capital 
stock  and  principal  place  of  business  of  each.  They  will  also  furnish  a  sepa- 
rat-e  list  of  all  corporations,  companies,  and  associations  organized  elsewhere 
(including  sucli  as  are  organiz<'(l  under  tlie  laws  of  a  foreign  country)  having 
their  principal  place  of  business  in  the  district  where  such  list  is  prepared. 
Duplicates  of  such  lists  will  be  made  by  each  collector,  one  copy  thereof  to  be 
retained  in  his  office,  and  the  other,  when  completed,  forwarded  to  the  Com-i 
missioner  of  Internal  Revenue.  Blanks  to  be  used  in  sucii  cases  will  be  fur- 
nished collectors;  and,  for  statistical  purposes  and  convenient  reference,  all 
such  corporations,  companies,  and  associations  will  be  classified  and  listed 
according  to  the  nature  of  the  business  carried  on,  as  follows: 

Class  A  —  Fiixmrial  and  commercial.  —  Including  banks,  banking  associa- 
tions, trust  companies,  guaranty  and  surety  companies,  title  insurance  com- 
panies, building  associations  (if  for  profit),  and  insurance  companies,  not 
specifically  exempt. 

(LASS  li  —  I'uhUr  srrrirr.  —  Such  as  railroads,  steamboat,  ferryboat,  and 
stage  line  (•ninj);mi<s;  [lipc  line,  gas,  and  electric-light  companies;  express, 
transportation,  and  storage  companies;  telegraph  and  telephone  companies. 

Class  C  —  Industrial  and  via)iiifnrturin(i.  —  Such  as  mining,  hunber,  and 
coke  companies;  rolling  mills;  foundry  and  machine  shops;  sawmills;  fiour, 
woolen,  cotton,  juul  ntlicr  mills;  tiiMnufiicturiTs  of  cars,  automobiles,  elevators, 
ngriculturai  implements,  and  nil  arliclcs  manufactured  wholly  or  in  part  from 
'"otal,  wood,  or  other  mateiial ;  mannf:iet urcrs  or  refiners  of  sutrar,  molasses, 
sirups,  or  other  products;  ice  and  refrigerating  companies;  slaughterhouse, 
tannery,  packing,  or  canning  companies,  etc. 

CiJVS.S  D — Mcrrnnlilr.- — Including  ;ill  dealers  (not  otherwise  classed  as 
producers  or  manufarturcrs)  in  coal,  lundicr.  grain,  produce,  and  all  goods, 
■wares,  and  mrrcliandisc. 

^LAH^  F, —  MinrrVanroHR.  —  Such  as  architects,  contractors,  hotel,  theater, 
or  fit  her  companies,  or  asHocintions,  not  otherwise  classed. 


Appendixes.  18 


o 


When  classified  as  above  indicated  the  names  of  the  various  corporations, 
companies,  and  associations  will  be  listed  alphabetically,  and  will  be  numbered 
consecutively  (commencing  with  No.  1  in  each  class),  and  in  forwarding  re- 
turns or  papers  subsequently  rendered  or  submitted  by  such  corporations  or 
companies  collectors  will  see  that  the  same  have  placed  thereon  the  desig- 
nating class  letter  and  number  corresponding  with  those  noted  on  the  lists 
herein  required  to  be  furnished. 

Special  instructions  regarding  the  form  of  return  to  be  rendered  by  such 
corporations,  and  as  to  the  preparation  of  assessment  lists  by  collectors,  will 
be  issued  in  due  season. 

J.   C.    WlIEELEB, 

Acti7ig  Commissioner. 
Approved : 

James  B.  Reynolds, 

Acting  Secretary  of  the  Treasury, 


186  Federal  Cokporatio::^^  Tax  Law. 


APPENDIX  C. 

(T.  D.   1571.) 
TREASURY    DEPARTMENT    REGUIrATION  NO.  31. 
Regulations  Relating  to  the  Assessment  and  Collection  of  the  Speciai 
Excise  Tax  Imposed  by  Section  38,  Act  of  August  5,  1909,  on  Corpo- 
rations, Joint  Stock  Companies,  Associations  and  Insurance  Com- 
panies. 

Treasury  Department, 

Office  of  Commissioner  of  Internal  Revenue, 

Washington,  D.  C,  December  3,  1909. 

Here  is  inserted  the  full  text  of  section  38  of  Chapter  VI,  United  States 

Statutes,  Gist  Congress,   First   Session,  pp.    II,   112-118,  all  as  set  forth   iu 

Appendix  A  above. 

Article   I. 

The  attention  of  collectors  and  others  is  specially  called  to  the  fact  that 
the  tax  imposed  by  this  section  of  the  law  applies  to  all  corporations,  joint 
stock  oonijjanics,  ass()ciatif)ns,  or  insurance  companies  described  (except  tliose 
specifically  exempted),  without  reference  to  the  kind  of  business  carried  on, 
and  that  the  tax  is  to  Im-  computed  upon  the  net  income  of  such  corporations, 
joint  stock  companies,  associations,  and  insurance  companies,  which  shall  be 
calculated  by  subtract inj^  from  the  {,'ross  income  received  from  all  sources 
during  the  year  certain  deductions  s^pccitically  set  forth  in  the  statute. 

Ever}'  corporation,  joint  stock  company,  association,  or  insurance  company 
not  specifically  enumerated  as  exempt  shall  make  the  return  required  by  law, 
whether  it  may  iiave  net  income  liable  to  (ax  or  not. 

In  the  case  of  corporations,  joint  stock  companies,  associations,  or  insurance 
companies  organized  under  the  authority  of  the  United  States  or  any  State 
or  Territory  tlx'reof,  including  Alaska  and  District  of  Columbia,  such  net 
income  relates  not  only  to  the  bnsiiu'ss  carried  on  witliin  the  confines  of  the 
I'nited  Stati's,  but  to  income  receiv<'d  from  business  transacted  in  any  foreign 
country  as  well.  In  case  of  corporations,  joint  stock  companies,  and  associa- 
tions organized  under  the  authority  of  foreign  countries  (he  terms  "Gross 
income,"  •'  \ct  income."  and  "Autliorized  deductiims  "  rela(e  only  to  business 
transacted  vviti)in  tiie  United  States  or  any  State  or  Territory  thereof. 

Article    2.  —  Gross    {ncomc. 

The  following  definitions  and  rules  are  given  for  determining  the  gross 
income  of  the  various  classes  of  corporations: 

I  A.  Hanks  ami  other  /inanvitil  ixsdlulions. — Cross  income  consists  of  the 
gross  revenue  dcrivi'd  fi-om  (he  opi-radon  and  management  of  (lie  Imsiness  and 
prop<'rty  of  the  cor|)ora(ion  making  (lie  n'tnrn,  togetlier  with  all  amounts  of 
incftme  (inelnding  diviilinds  received  on  stcx-k  of  oIIht  corporadons.  joint 
K(ock  eotn|)anies.  aHsocia(ions,  and  insurance  comj)a,nies  subject  to  tliis  tax) 
i!»'rived  from  all  nthrT  Mnnrccs,  as  shown  by  (lie  entries  on  its  books  from 
.lanu  .rv    I   tr    Dec<'riilK'r  .'II   of  (he  year  for   which   return   is  made. 


Appendixes.  187 

1  B.  Insurance  companies.  —  Same  as  1  A  above. 

2.  Transportation  companies.  —  Same  as  1  A  above. 

3.  Manufacturing  companies.  —  Gross  income  received  during  the  year  from 
all  sources  will  consist  of  the  total  amount,  ascertained  through  an  account 
ing,  that  shows  the  difference  between  the  price  received  for  the  goods  as  sold 
and  the  cost  of  such  goods  as  manufactured.    The  cost  of  goods  manufactured 
shall  be  ascertained  by  an  addition  of  a  charge  to  the  account  of  the  cost  of 
goods  as  manufactured  during  the  year  of  the  sum  of  the  inventory  at  begin 
ning  of  the  year  and  a  credit  to  the  account  of  the  sum  of  the  inventory  at 
the  end  of  the  year.     To  this  amount  should  be  added  all  items  of  income  re 
ceived  during  the  year  from   other  sources,   including  dividends   received   on 
stock  of  other  corporations,  joint  stock  companies,  associations,  and  insurance 
companies   subject   to   this  tax.      In   the   determination   of  the   cost  of  goods 
manufactured  and  sold  as  above  such  cost  shall  comprehend  all  charges  fjor 
maintenance   and   operation   of   manufacturing  plant,   but  shall   not  embrace 
allowances  for  depreciation  of  property  nor  for  losses  sustained  which  are  to 
be  taken  account  of  in  ascertaining  the  net  income  subject  to  tax  under  the 
proper  heading  in  the  authorized  deductions. 

4.  Mercantile  companies.  —  Gross  amount  of  income  received  during  the 
year  from  all  sources  consists  of  the  total  amount  ascertained  through  inven- 
tory, or  its  equivalent,  which  shows  the  difference  between  the  price  received 
for  goods  sold  and  the  cost  of  goods  purchased  during  the  year,  with  an  addi 
tion  of  a  charge  to  the  account  of  the  sum  of  the  inventory  at  beginning  of 
the  year  and  a  credit  to  the  account  of  the  sum  of  the  inventory  at  the  end 
of  the  year.  To  this  amount  should  be  added  all  items  of  income  receiv-d 
during  the  year  from  other  sources  inclusive  of  dividends  received  on  stock 
of  other  corporations,  joint  stock  companies,  associations,  and  insurance  com 
panies  subject  to  this  tax.  In  determining  this  amount  no  account  shall  be 
taken  of  allowances  for  depreciation  of  property,  nor  for  losses  sustained 
which  are  to  be  taken  account  of  in  ascertaining  the  net  income  subject  to  tax 
under  the  proper  heading  in  the  authorized  deductions. 

5.  Miscellaneous.  —  Gross  income  consists  of  the  gross  revenue  derived  from 
the  operation  and  management  of  the  business  and  property  of  the  corporation 
making  the  return,  together  with  all  amounts  of  income  (including  dividends 
received  on  stock  of  other  corporations,  joint  stock  companies,  associations, 
and  insurance  companies  subject  to  this  tax)  derived  from  all  other  sourcos 
as  shown  by  the  entries  on  the  books  from  January  1  to  December  31  of  the 
year  for  which  return  is  made. 

It  will  be  noted  from  these  definitions  that  gross  income  is  practically  the 
same  as  gross  profits,  the  only  difference  being  that  gross  income  is  more  in- 
clusive, embracing  as  it  does  not  only  gross  profits  of  the  corporation,  joint 
stock  company,  and  association  itself,  but  also  all  amounts  of  income  received 
from  other  sources.  It  is  immaterial  whether  any  item  of  gross  income  is 
evidenced  by  cash  receipts  during  the  year  or  in  such  other  manner  as  to 
entitle  it  to  proper  entry  on  the  books  of  the  corporation  from  January  1  to 
December  31  for  the  year  in  which  return  is  made. 

Sale  of  capital  assets.  —  In  ascertaining  income  derived  from  the  sale  of 
capital  assets,  if  the  assets  were  acquired  subsequent  to  January  1.  IflOfl,  the 
difference  between  the  selling  price  and  the  buying  price  shall  constitute  an 


188         Federal  Cobpokation  Tax  Law. 

item  of  gross  income  to  he  added  to  or  subtracted  from  gross  income  accord- 
ing to  whether  the  selling  price  was  greater  or  less  than  the  buying  price.  If 
the  capital  assets  were  acquired  prior  to  January  1,  1909,  the  amount  of 
increment  or  depreciation  representing  the  difl'erence  between  the  selling  and 
buying  price  is  to  be  adjusted  so  as  to  fairly  determine  the  proportion  of  the 
loss  or  gain  arising  subsequent  to  January  1,  1909,  and  which  proportion  shall 
be  deducted  from  or  added  to  the  gross  income  for  the  year  in  which  the  sale 
was  made.  But  for  the  purpose  of  determining  the  selling  price,  as  provided 
in  this  section,  there  shall  be  added  to  the  price  actually  realized  on  sale  any 
amount  which  has  already  been  set  aside  and  deducted  from  gross  income  by 
way  of  depreciation  as  defined  in  article  4  and  has  not  been  paid  out  in 
making  good  such  depreciation  on  the  property  sold. 

\\  here  a  corporation  is  engaged  in  carrying  on  more  than  one  class  of  busi- 
ness, gross  income  derived  from  the  different  classes  of  business  shall  be  ascer- 
tained according  to  the  definitions  above  applicable  thereto. 

Article  3.  —  Net  income. 

Net  income  shall  be  ascertained  by  deducting  from  the  gross  amount  of  the 
income  of  such  corporation,  joint  stock  company  or  association,  or  insurance 
company,  received  witliin  the  year  from  all  sources,  (first)  all  the  ordinary 
and  necessary  expenses  actually  paid  within  the  year  out  of  income  in  the 
maintenance  and  operation  of  its  business  and  properties,  including  all  charges 
such  as  rentals  or  franchise  payments,  required  to  be  made  as  a  condition  to 
the  continued  use  or  possession  of  property;  (second)  all  losses  actually  sua 
tained  within  the  year  and  not  compensated  by  insurance  or  otherwise,  includ- 
ing a  reasonable  allowance  for  depreciation  of  property,  if  any,  and  in  the  case 
of  insurance  companies  the  sums  other  than  dividends  paid  within  the  year 
on  policy  and  annuity  contracts  and  the  net  addition,  if  any,  required  by  law 
to  be  made  within  the  year  to  reserve  funds;  (third)  interest  actually  paid 
within  the  year  on  its  bonded  or  other  indebtedness  to  an  amount  of  such 
bonded  and  other  indebtedness  not  exceeding  the  paid  up  capital  stock  of  such 
corporation,  joint  stock  company  or  association,  or  insurance  company,  out- 
standing at  the  close  of  the  year,  and  in  the  case  of  a  bank,  banking  associa- 
tion, or  trust  company,  all  interest  actually  paid  by  it  within  the  year  on 
deposits,  [in  case  of  cor|)orations,  joint  stock  companies,  and  associations 
organized  un(i<>r  the  laws  of  a  foreign  country,  "  the  proportion  of  its  paid-up 
capital  stock  outstanding  at  the  close  of  the  year  which  the  gross  amount  of 
its  income  for  tlie  year  from  business  transacted  and  capital  invested  within 
tho  Triiti'd  States  and  any  of  its  Territories,  Alaska,  and  tlie  District  of  Co- 
lumbia licars  to  the  gross  amount  of  its  income  derived  from  all  sources  within 
and  without  the  United  States"]"  (fourth)  all  sums  paid  by  it  within  the 
year  for  taxes  imposed  under  the  authority  of  the  United  States  or  of  any 
Slnte  or  Territory  thereof,  or  imposed  by  the  government  of  any  foreign 
country  as  a  condition  to  carrying  on  business  therein;  (fifth)  all  amounts 
received  by  it  within  the  year  as  dividends  upon  stock  of  other  corporations, 

"The  matter  iiiclii(l<'(l  in  brnckrts  \  ]  relntes  to  iiiterrst  notiially  p.'iid  within 
the  year  on  "  bomlrd  (tr  other  in'^btrdnrNs,"  and  slioiihl  be  road  in  connection 
with  the  precedinc  provision  (art.  .3)  relating  to  sneh  interest  paid  by  corpo- 
rations,  joint  stork  companies,  etc.,  organized  in  the  United  States, 


APPENDIXES,  Igjj 

joint  stock  companies  or  associationa,  or  insurance  companies,  subject  to  the 
tax  hereby  imposed. 

Section  38  further  provides: 

That  in  the  case  of  a  corporation,  joint  stock  company  or  association,  or 
insurance  company,  organized  under  the  laws  of  a  foreign  country,  such  net 
income  shall  be  ascertained  (by  making  like  deductions)  from  the  gross 
amount  of  its  income  received  within  the  year  from  business  transacted  and 
its  capital  invested  within  the  United  States  and  any  of  its  Territories,  Alaska, 
and  the  District  of  Columbia. 

Also  that: 

In  the  case  of  assessment  insurance  companies  the  actual  deposit  of  sums 
with  state  or  territorial  officers,  pursuant  to  law,  as  additions  to  guaranty  or 
reserve  fund,  shall  be  treated  aa  being  payments  required  by  law  to  reserve 
fund. 

Also  (third  paragraph)  that: 

There  shall  be  deducted  from  the  amount  of  the  net  income  of  each  of  such 
corporations,  joint  stock  companies  or  associations,  or  insurance  companies, 
ascertained  as  provided  in  the  foregoing  paragraphs  of  this  section,  the  sum  of 
five  thousand  dollars. 

The  net  income,  therefore,  is  the  remainder  of  the  gross  income  after  making 
the  specified  deductions. 

Abticle   4.  —  Deductions. 

The  specified  deductions  actually  paid  within  the  year,  set  forth  in  the 
statute  and  as  described  in  article  3  preceding,  shall  include  all  proper  items 
of  expenses  and  charges  under  the  respective  heads  as  designated.  Tlie  amount 
returned  for  ordinary  and  necessary  expenses  actually  paid  within  the  year 
out  of  income  in  maintenance  and  operation  of  the  business  and  properties  of 
tlie  corporation  should  not,  however,  embrace  allowances  for  depreciation  of 
fixed  property  which  are  otherwise  to  be  taken  account  of  under  the  proper 
heading  in  the  authorized  deductions,  nor  expenses  paid  Avithin  the  year  and 
charged  to  such  allowances  for  depreciation  credited  in  the  current  year  or  in 
previous  years.  In  ascertaining  expenses  proper  to  be  included  in  the  deduc- 
tions to  be  made  under  this  article,  corporations  carrying  materials  and  sup- 
plies on  hand  for  use  should  include  in  such  expenses  the  charges  for  materials 
and  supplies  only  to  the  amount  that  the  same  are  actually  disbursed  and 
used  in  operation  and  maintenance  during  the  year  for  which  the  return  is 
made. 

It  is  immaterial  whether  the  deductions  are  evidenced  by  actual  disburse- 
ments in  cash,  or  whether  evidenced  in  such  other  way  as  to  be  properly 
acknowledged  by  the  corporate  officers  and  so  entered  on  the  books  as  to  con- 
stitute a  liability  against  the  assets  of  the  corporation,  joint  stock  company, 
association,  or  insurance  company  making  the  return. 

Losses.  —  The  deductton  for  losses  must  be  in  respect  of  losses  actually  sus- 
tained during  the  year  and  not  compensated  by  insurance  or  otherwise.  It 
must  be  basad  upon  the  difference  between  the  cost  value  and  salvage  value 
of  the  property  or  assets,  including  in  the  latter  value  such  amount,  if  any, 
as  has  in  the  current  or  previous  years  been  set  aside  and  deducted  from  gross 


190        Federal  Cokpokation  Tax  Law. 

income  by  way  of  depreciation  as  defined  in  tlie  following  section  and  not  been 
paid  out  in  making  good  such  depreciation. 

Depreciation.  —  The  deduction  for  depreciation  should  be  the  estimated 
amount  of  the  loss,  accrued  during  the  year  to  which  the  return  relates,  in  the 
value  of  the  pro))erty  in  respect  of  which  such  deduction  is  claimed  that  arises 
from  exliaustion.  wear  and  tear,  or  obsolescence  out  of  the  uses  to  which  the 
property  is  put.  and  which  loss  has  not  been  made  good  by  payments  for  ordi- 
nary maintenance  and  repairs  deducted  under  the  heading  of  expenses  of 
maintenance  and  operation  or  in  the  ascertainment  of  gross  income.  This 
csLiniate  should  be  formed  upon  the  assumed  life  of  the  property,  its  cost 
value,  and  its  use.  Expenses  paid  in  any  one  year  in  making  good  exhaustion, 
wear  and  tear,  or  obsolescence  in  respect  of  which  any  deduction  for  deprecia 
tion  is  claimed  must  not  be  included  in  the  deduction  for  expense  of  mainte- 
nance and  operation  of  the  property  or  in  the  ascertainment  of  gross  income, 
but  must  be  made  out  of  accumulative  allowances  deducted  for  depreciation  in 
current  and  previous  years. 

Article  5.  —  Inventories. 

It  will  be  noted  thai  an  inventory  or  its  equivalent  of  materials,  supplies, 
and  merchandise  on  hand  for  use  or  sale  at  the  close  of  each  calendar  year  is 
essential  in  the  case  of  certain  corporations  in  order  to  determine  the  gross 
income,  and  in  case  of  other  corporations  to  determine  their  expenses  of 
operation.  Wliere  such  inventory  or  its  equivalent  was  not  taken  at  the  close 
of  the  year  1908.  a  supplemental  statement  showing  such  inventory  approxi- 
mately must  be  submitted  with  the  return  on  the  regular  form.  Such  supple- 
mental statement  shall  he  verified  under  oath  by  the  treasurer  or  principal 
financial  ofiicer  in  submitting  the  sanu'. 

Where  any  item  under  any  of  the  deductions  is  of  an  unusual  nature  a 
special  explanatory  note  referring  to  such  item  shall  be  made  and  attached 
to  the  form  at  the  appropriate  place  and  made  a  part  thereof  by  proper 
reference. 

Paragraph  3  of  said  section  .'J8  also  provides: 

And  said  tax  shall  be  computed  upon  the  remainder  of  said  net  income  of 
such  corporation,  jnint  stock  company  or  association,  or  insurance  company, 
for  tlic  year  ending  Decemi)er  tliirty-first,  nineteen  hundred  and  nine,  and  for 
each  cnlciidar  year  tliereafter;  mihI  on  or  before  the  first  day  of  Marcli,  nine 
t^'cii  huiulred  and  ten,  and  I  lie  lirst  day  of  Marcli  in  each  year  thereafter,  a 
tru.'  and  aeeiirate  icliiiii  iiiilcr  mitli  or  ^illirinal  ion  of  it^<  president,  vice-presi- 
dent, or  otiicr  pritici|i:il  olliccr.  and  its  trcasur^'r  or  assistant  treasurer,  shall 
bi'  made  liy  <'a.'h  of  the  corporations,  joint  stock  comjiaiiies  or  associations, 
and  insurance  companies,  sid)jcct,  to  the  tax  iinposcd  by  tliis  .section,  to  the 
Cdllcctnr  of  iM'criial  r<'\('tinc  for  the  district  in  which  sncli  corporation,  joint 
stock  comy)ariv  or  associutiori.  or  insniancc  company,  has  its  principal  plac» 
of  busin<'ss,  or,  in  the  case  of  n  corpoi;it  ion.  joint  stuck  company  or  associa- 
tion, or  iriHur.ince  company.  orf;ani/ed  niKh-r  tlw  laws  of  a  foreign  country, 
in  the  [il:ice  where  its  priii(i|i;il  l)usiness  is  carri«'d  o!i  within  the  Hnited  States, 
in  such  form  as  the  (!om?nisHioncr  of  Internal  Revenue,  with  the  approval  of 
the  Secretary  <if  the  Treasury,  shall    prescrilK-. 


Appendixes.  i91 

Each  return  so  made  is  required  to  set  forth: 

(a)  The  total  amount  of  the  paid-up  capital  stock  of  such  corporations, 
joint  stock  companies  or  associations,  or  insurance  companies,  outstanding  at 
the  close  of  the  year ; 

(6)  The  total  amount  of  bonded  and  other  indebtedness  of  such  corporation, 
joint  stock  company  or  association,  or  insurance  company,  at  the  close  of  the 
year; 

(c)  The  gross  amount  of  the  income  of  such  corporation,  joint  stock  com- 
pany or  association,  or  insurance  company,  received  during  the  year  from  all 
sources,  and  if  organized  under  the  laws  of  a  foreign  country,  the  gross  amount 
of  its  income  received  within  the  year  from  business  transacted  and  capital 
invested  within  the  United  States  and  any  of  its  Territories,  Alaska,  and  the 
District  of  Columbia. 

Such  returns  are  also  required  to  set  forth  the  items  claimed  as  deductions 
(Article  4),  also  the  net  income  after  such  deductions  have  been  made. 

Article  6. 

Under  the  authority  conferred  by  this  act  forms  of  return  have  been  pre- 
scribed, in  which  the  various  items  specified  in  the  law  are  to  be  stated. 

Blank  forms  of  this  return  will  be  mailed  to  collectors  and  should  be  fur- 
nished to  everj-  corporation,  not  expressly  excepted,  on  or  before  January  1, 
1010,  and  on  or  before  January  1st  of  each  year  thereafter.  Failure  on  thei 
part  of  any  corporation,  joint  stock  company,  association,  or  insurance  com- 
pany liable  to  this  tax,  to  receive  a  blank  form  will  not  excuse  it  from  making 
the  return  required  by  law.  or  relieve  it  from  any  penalties  for  failure  to 
make  the  return  in  the  prescribed  time.  Corporations  not  supplied  with  the 
proper  forms  for  making  the  return  should  make  application  therefor  to  the 
collector  of  internal  revenue  in  whose  district  is  located  its  principal  place 
of  business.  Each  corporation  should  carefully  prepare  its  return  so  as  to 
fully  and  clearly  set  forth  the  data  therein  called  for. 

Bookkeeping.  —  No  particular  system  of  bookkeeping  or  accounting  will  be 
required  by  the  Department.  However,  the  business  transacted  by  corpora- 
tions, joint  stock  companies,  associations,  or  insurance  companies  must  be  so 
recorded  that  each  and  every  item  therein  set  forth  may  be  readily  verified 
by  an  examination  of  the  books  and  accounts,  where  such  examination  is 
deemed  necessary. 

Calendar  year.  —  As  the  law  specifically  provides  that  the  tax  imposed  shall 
be  computed  on  the  net  income  during  each  "  calendar  year,"  returns  of  income 
based  on  any  period  other  than  the  calendar  year  can  not  be  accepted. 

Corporations  organized  during  the  year  or  going  into  liquidation  during  the 
year  should  nevertheless  render  a  sworn  return  on  the  prescribed  form. 

Article  7. 

Collectors  will  see  that  as  soon  as  each  return  made  by  any  corporation  is 
received  a  record  on  Form  632  is  made,  setting  out  the  name  of  the  corpora- 
tion making  the  return,  the  nature  of  the  principal  business  transacted,  the 
location  of  principal  place  of  business.  Avith  net  income  reported,  and  the  date 
on  which  such  return  was  received.  The  date  of  receipt  in  each  case  will  he 
noted  in  the  last  column  of  that  form,  in  wliich  column  the  list  on  whicb 
assessment  is  made  will  also  be  noted.     For  this  purpose  the  column  so  u-^ed 


192        Pedekal  Corporation  Tax  Law. 

may  be  subdivided,  or  the  date  of  receipt  of  such  returns  may  be  noted  in  red 
ink  over  the  date  entered  therein  as  to  such  assessment  list. 

Any  collector  will,  whenever  it  appears  advisable  to  do  so,  request  that  a 
revenue  agent  be  specially  designated  to  collect  and  furnish  this  oflice  with 
such  other  data  as,  in  his  judgment,  is  necessary  to  determine  the  actual 
amount  of  tax  to  be  assessed  against  any  corporation,  joint  stock  company, 
or  association  which  under  the  law  set  forth  in  these  regulations  is  required 
to  make  return. 

Such  returns  are  required  to  be  made  not  laiter  than  March  1  of  each  year, 
and  any  failure  to  complj'  with  the  law  in  this  regard  should  be  at  once 
reported  by  the  collector  to  the  Commissioner  of  Internal  Revenue. 

To  enable  collectors  to  determine  whether  all  returns  due  have  been  received, 
a  careful  canvass  of  each  district  should  be  made,  and  all  corporations,  joint 
stock  companies,  and  associations  subject  to  the  tax  imposed  should  be  listed 
as  above  directed. 

Article  8. 

For  statistical  purposes  all  such  corporations,  joint  stock  companies,  ajid 
associations  will  be  classified  as  follows: 

Class  A:  Financial  and  commercial.  —  Including  banks.  ba.nking  associa- 
tions, trust  companies,  guaranty  and  surety  companies,  title  insurance  com- 
panies, building  associations  (if  for  profit),  and  insurance  companies,  not 
specifically  exempt. 

Class  B:  Public  sennce.  —  Such  as  railroads,  steamboat,  ferryboat,  and 
stage-line  companies;  pipeline,  gas,  and  electric-light  companies;  express, 
transportation,  and  storage  companies;   telegraph  and  telephone  companies. 

Class  C:  Jndtistrial  and  manufacturing.  Such  as  mining,  lumber,  and 
coke  companies;  rolling  mills;  foundry  a.nd  machine  shops;  sawmills;  flour, 
woolen,  cotton,  and  otlier  mills;  manufacturers  of  cars,  automobiles,  elevators, 
agricultural  implements,  and  all  articles  manufactured  wholly  or  in  part  from 
metal,  wood,  or  other  material;  manufacturers  or  r<'finers  of  sugar,  molasses, 
sirups,  or  other  products;  ice  and  refrigerating  companies;  slaughterhouse, 
tannery,  packing,  or  canning  companies,  etc. 

Class  D:  Mercantile.  —  Including  all  dealers  (not  otherwise  classed  as 
producers  or  manufacturers)  in  coal,  lumber,  grain,  produce,  and  all  g\)od8, 
wares,  and  merchaii<lise. 

Class  E:  Miscellaneous.  —  Such  as  architects,  contractors,  hotel,  theater, 
or  otlu-r  companies   or  associations,  not  otherwise  classed. 

When  classified  as  above  indicated  the  names  of  the  various  corjKirations, 
companies,  and  associations  will  be  listed  alphabetically,  and  will  be  numbered 
consecutively  (comniciicin^'  with  No.  1  in  <<irh  class),  and  in  forwarding  re- 
turns or  papers  suli^cfiiicnt  ly  renclcred  or  sul)mit<<'d  by  Huch  corporations  or 
C'liiipanies  collectors  will  sec  tlint  fhn  same  hnvn  pbu'e<i  (hereon  tlie  designating 
cInsH  letter  and  niimlicr  corresponding  with  tiiose  noted  on  the  lists  herein 
rc(|iiir«'i|  to  lie   fiDiiJHlicd. 

Aktici.k  9.  —  Examination  nf  hnakn,  etc.,  by  revenue  agents. 
Paragraph  4  of  said  srction  ns  jirovirles: 

Fourth.  Whenovor  rvi(I''iiof  'ilinll  lie  prfMliir-cil  Itfforc  the  Commissioner  of 
Internal  Revenue  whicli   in  tlic  iipiiiion  of  the  commissioner  justifies  the  belief 


Appendixes.  193 

iliat  the  return  made  by  any  corporation,  joint  stock  company  or  association, 
vr  insuranco  company,  is  incorrect,  or  whenever  any  collector  shall  report  to 
the  Commissioner  of  Internal  Revenue  tliat  any  corporation,  joint  stock  com- 
pany or  association,  or  insurance  company,  has  failed  to  make  a  return  as 
required  by  law,  the  Commissioner  of  Internal  Revenue  may  require  from  the 
corporation,  joint  stock  company  or  association,  or  insurance  company  making 
such  return,  such  further  information  with  reference  to  its  capital,  income, 
losses,  and  expenditures  as  he  may  deem  expedient;  and  the  Commissioner  of 
Internal  Revenue,  for  the  purpose  of  ascertaining  the  correctness  of  such 
return  or  for  the  purpose  of  making  a  return  wliere  none  has  been  made,  is 
hereby  authorized,  by  any  regularly  appointed  revenue  agent  specially  desig- 
nated by  him  for  that  purpose,  to  examine  any  books  and  papers  bearing  upon 
the  matters  required  to  be  included  in  the  return  of  such  corporation,  joint 
stock  company  or  association,  or  insurance  company,  and  to  require  the  at- 
tendance of  any  officer  or  employee  of  such  corporation,  joint  stock  company 
or  association,  or  insurance  company,  aJid  to  take  his  testimony  with  reference 
to  the  matter  required  by  law  to  be  included  in  such  return,  with  power  to 
administer  oaths  to  such  person  or  persons;  and  the  Commissioner  of  Internal 
Revenue  may  also  invoke  the  aid  of  any  court  of  the  United  States  having 
jurisdiction  to  require  the  attendance  of  such  officers  or  employees  and  the 
production  of  such  books  and  papers.  Upon  the  information  so  acquired  the 
Commissioner  of  Internal  Revenue  may  amend  any  return  or  make  a  return 
where  none  has  been  made.  All  proceedings  taken  by  the  Commissioner  of 
Internal  Revenue  luider  the  provisions  of  this  section  shall  be  subject  to  the 

approval  of  the  Secretary  of  the  Treasury,  .if. 

* 

Akticlk  10.  —  Assessment  and  collection  of  tax,  etc. 

Paragraph  5  of  said  section  38  provides: 

Fifth.  All  returns  shall  be  retained  by  the  Commissioner  of  Internal  Rev- 
enue, who  shall  make  assessments  thereon;  and  in  case  of  any  return  made 
with  false  or  fraudulent  intent,  he  shall  add  one  hundred  per  centum  of  such 
tax,  and  in  case  of  a  refusal  or  neglect  to  make  a  return  or  to  verify  the  same 
as  aforesaid  he  shall  add  fifty  percentum  of  such  tax.  In  case  of  neglect 
occasioned  by  the  sickness  or  absence  of  an  officer  of  such  corporation,  joint 
stock  company  or  association,  or  insurance  company,  required  to  make  said 
return,  or  for  other  sufficient  reason,  the  collector  may  allow  such  further 
time  for  making  and  delivering  such  return  as  he  may  deem  necessary,  not 
exceeding  thirty  days.  The  amount  so  added  to  the  tax  shall  be  collected  at 
the  same  time  and  in  the  same  manner  as  the  tax  originally  assessed  unless 
the  refusal,  neglect,  or  falsity  is  discovered  after  the  date  for  payment  of  said 
taxes,  in  which  case  the  amount  so  added  shall  be  paid  by  the  delinquent  cor- 
poration, joint  stock  company  or  association,  or  insurance  company  immedi- 
ately upon  notice  given  by  the  collector.  All  assessments  shall  be  made  and 
the  several  corporations,  joint  stock  companies  or  associations,  or  insurance 
companies,  shall  be  notified  of  the  amount  for  which  they  are  respectivelv 
liable  on  or  before  the  first  day  of  June  of  each  successive  year,  and  said  assess- 
ments shall  be  paid  on  or  before  the  thirtieth  day  of  June,  except  in  cases  of 
refusal  or  neglect  to  make  such  return,  and  in  cases  of  false  or  fraudulent 
returns,  in  which  cases  the  Commissioner  of  Internal  Revenue  shall,  upon  the 
Fed.  Cobp.  Tax  —  13 


191         Federal  Corpokation^  Tax  Law. 

discovery  thereof,  at  any  time  witliin  three  years  after  said  return  is  due, 
make  a  return  upon  information  obtained  as  above  provided  for,  and  the  assess- 
raent  made  by  the  Commissioner  of  Internal  Revenue  thereon  shall  be  paid  by 
such  corporation,  joint  stock  company  or  association,  or  insurance  company 
immediately  upon  notification  of  the  amount  of  such  assessment ;  and  to  any 
sum  or  sums  due  and  unpaid  after  the  thirtieth  day  of  June  in  any  year,  and 
for  ten  days  after  notice  and  demand  thereof  by  the  collector,  there  shall  be 
added  the  sum  of  five  per  centum  on  the  amount  of  tax  unpaid  and  interest 
at  the  rate  of  one  per  centum  per  month  upon  said  tax  from  the  time  the  same 
becomes  due. 

Upon  the  receipt  and  verification  of  the  returns  rendered,  tlie  tax  as  ascer- 
tained to  be  due  will  be  assessed  as  above  prescribed;  and  notice  of  such  assess- 
ment will  be  given  and  subsequent  demand  made  (if  necessary)  on  Forms  17 
and  21,  respectively. 

In  case  of  failure  to  make  returns  within  the  time  and  manner  required  by 
the  statute,  or  where  the  return  rendered  is  found  or  believed  to  be  incorrect, 
action  in  such  cases  will  be  taken,  as  provided  in  paragraph  4  of  the  law. 

Tlie  additional  tax  imposed  by  paragraph  5  of  the  law  for  failure  to  make 
the  required  return,  or  for  making  a  false  or  fraudulent  return,  will  in  all 
cases  be  assessed  as  therein  provided. 

Article    11.  —  Returns  to  constitute  public  records. 

Paragraph  6  of  said  section  38  provides: 

Sixth.  When  the  assessment  shall  be  made,  as  provided  in  this  section,  the 
returns,  together  with  any  corrections  thereof  which  may  have  been  made  by 
the  commissioner,  shall  be  filed  in  tlio  oflico  of  the  Commissioner  of  Tntornal 
Revenue  and  shall  constitute  public  records  and  be  open  to  inspection  as  such. 

Article    12.  —  Penalties. 

Paragraphs  7  and  8  of  section  38  provide: 

Seventh.  It  shall  be  unlawful  for  any  collector,  deputy  collector,  agent,  clerk, 
or  other  officer  or  employee  of  the  United  States  to  divulge  or  make  known  in 
any  manner  whatever  not  provided  by  law  to  any  person  any  information 
obtaintcl  by  liiiii  in  tlie  discliarge  nf  his  official  duty,  or  to  divulge  or  make 
known  in  any  manner  not  prnviih'd  by  law  any  document  received,  evidence 
taken,  or  report  made  under  this  section  excejit  upon  the  special  direction  of 
the  President;  and  any  offense  against  the  foregoing  provision  shall  be  a  mis- 
demeanor and  1)1'  puiiislK'd  l)y  a  flue  not  cxecediiig  mie  thousand  dollars,  or  by 
imprisonmr'nt  not  exceeding  one  year,  or  l)oth.  at  the  discretion  of  the  court. 

Kightli.  If  any  of  the  corporations,  joint  stock  compaTiies  or  associations,  or 
insurance  companies,  aforesaid,  shall  refuse  or  neglect  to  make  a  return  at 
the  time  or  times  hereinbefore  specified  in  cucli  year,  or  shall  rendor  a  false 
or  fraudulent  return,  sucli  corporation,  joint  stock  company  or  association,  or 
insurance  company,  shall  be  liable  to  a  penalty  of  not  less  than  one  thousand 
dollars  and  not  exceedinjr  ten  thousand  dollars. 

Any  person  aiithori/cvl  by  law  to  make,  render,  sign,  or  verify  any  return 
who  makes  any  false  fir  frandiilont  roturn.  or  statement,  with  intent  to  dcfen' 
or  evade  the  assessment  required  by  this  s<>ction  to  be  in.-iilc,  shall  be  guilty  of 
a  misdemeanor,  and  shall  be  fined  not  exceeding  one  thousand  dollars  or  be 


Appendixes.  195 

imprisoned  not  exceeding  one  year,  or  both,  at  the  discretion  of  the  court,  with 
the  costs  of  prosecution. 

ARTICLE   13.  —  Certain   revenue   laws   made   applicable,  and  jurisdiction  con- 
ferred on  United  States  courts  to  compel  attendance  of  ivitnesses,  etc. 

Paragraph  8  further  provides : 

All  laws  relating  to  the  collection,  remission,  and  refund  of  internal-revenue 
taxes,  so  far  as  applicable  to  and  not  inconsistent  with  tlie  provisions  of  this 
section,  are  hereby  extended  and  made  applicable  to  the  tax  imposed  by  this 
section. 

Jurisdiction  is  hereby  conferred  upon  the  circuit  and  district  courts  of  the 
United  States  for  the  district  within  which  any  person  summoned  under  this 
section  to  appear  to  testify  or  to  produce  books,  as  aforesaid,  shall  reside,  to 
compel  such  attendance,  production  of  books,  and  testimony  by  appropriate 
process. 

ARTICI.E  14.  —  Collection  of  tax. 
The  tax  assessed  under  the  provisions  of  this  act  will  be  collected  and  will 
be  receipted  for  on  Form  1,  as  in  the  case  of  other  assessed  taxes.  Unless 
paid  within  the  time  fixed  by  the  statute,  notice  and  demand  should  be  at  onoe 
issued,  and,  in  case  of  nonpayment,  distraint  proceedings  should  be  instituted 
without  delay. 

Royal  E.  Cabell, 

Commissioner. 
Approved : 

Franklin  MacVeagh, 

Secretary  of  the  Treasury. 


196        Federal  Coepoeation  Tax  Law. 


APPENDIX  D. 

(T.  D.  1578.) 

TREASURY  DEPARTMENT  REGULATION. 

Excise    Tax. 

Trbl\suby  Department, 
Office  of  Commissioner  Internal  Revenue, 

Washington,  D.  C,  January  4,   1910. 

To  collectors  of  internal  revenue  and  others  interested : 

Many  inquiries  have  been  made  at  this  office  concerning  the  requirements  of 
section  .38,  act  of  August  5.  1909,  levying  an  excise  tax  of  1  per  cent  of  the 
total  net  income  over  $.5,000  of  corporations,  as  to  the  time  that  must  me 
covered  by  the  returns  of  such  corporations. 

In  order  that  the  position  of  this  office  may  be  known  to  all  interested  in 
this  subject,  attention  is  invited  to  the  language  of  the  act  bearing  on  this 
point.     Subdivision  3  reads,  in  part,  as  follows : 

*  *  *  and  said  tax  shall  be  computed  upon  the  remainder  of  said  not 
income  of  such  corporation,  joint  stock  company  or  association,  or  insurance 
company,  for  the  year  ending  December  thirty-first,  nineteen  hundred  and  nine, 
and  for  each  calendar  year  thereafter. 

From  this  it  will  be  seen  that  the  law  fixes  the  calendar  year  as  the  period 
to  be  covered  by  these  returns,  and  no  one  is  vested  with  discretionary  power 
to  change  it. 

Many  inquiries  have  been  submitted  as  to  the  manner  of  arriving  at  an  in- 
ventory .lanuary  1,  1909.  when  none  was  taken  on  that  date  and  whore  the 
fiscal  year  of  the  corporation  ends  with  a  date  other  than  December  31. 

In  article  r*  of  Regulations  No.  31  it  is  stated  that  an  inventory  or  its 
equivalent  of  materials,  Hupplies,  and  merchandise  on  hand  for  use  or  sale  at 
the  close  of  each  calendar  year  is  essential  in  the  case  of  certain  corjmrations 
in  order  to  determine  the  gross  income,  and  in  case  of  other  corporations  to 
determine  their  expenses  of  o])eration.  Where  sucli  inventory  or  its  equiva- 
lent was  not  taken  at  the  close  of  the  year  1908,  a  sui)|)lemental  statement 
showing  such  inventory  approximately  must  be  submitted  with  the  return  on 
the  n'guhir  form.  Such  supplemental  statement  shall  be  verified  under 
oath,  etc. 

I'nder  the  «tatute  no  return  for  a  peri()<l  other  tlian  tlie  calendar  year  can 
be  accepted.  The  primary  object  to  be  kept  in  view  is  tlie  preparation  of  a 
fitatem<'nt  or  return  which  sliall  correctly  set  forth  the  net  iiu-otne  taxable 
under  the  law.  If  this  can  be  accomplished  without  the  necessity  of  an  inven- 
tory, either  at  the  beginning  or  the  close  of  the  calendar  year,  actual  inven- 
tories are  not  necessary.  If,  hf)wever,  a  statement  ,mich  ns  may  be  verified  by 
oath  of  ttie  officers  of  the  corporation,  showing  (tie  mt  taxable  incoiiu'.  can  not 
1)0  made  without  an   inventory,  then   tlie  same   is  necessarily   n-quired. 

It  is  believed  that  corporations  whose  business  is  of  sufficient  volume  to 
produce  a  taxable  income  under  this  law  would  ordinarily  keep  such  books  aa 


Appendixes.  I97 

would  enable  them  to  arrive  at  a  book  inventory,  or  what  might  be  termed  the 
"  equivalent "  of  an  inventory,  for  the  period  between  the  1st  of  January  and 
the  end  of  their  fiscal  years.  While  the  office  is  unable  to  set  fortli  any  rule 
m  this  connection  for  arriving  at  inventories  or  their  equivalents,  the  corpora- 
tions will  readily  see  the  necessity  of  resorting  to  the  best  means  at  their 
hands  to  show  in  their  sworn  returns  their  net  taxable  income. 

Royal  E.  Cabell, 

Commissioner. 


198  Fedekal  CoKroKATiOJNf  Tax  Law. 


APPEin)IX  E. 

(T.  D.  1583.) 
TREASURY  DEPARTMENT  REGULATION. 

Special  Excise  Tax. 

Treasury  Department, 
Office  of  Commissioner  of  Internal  Re\'bnxie;, 

Washington,  D.  C,  January  18,  1910. 

In  view  of  the  fact  that  the  tax  imposed  by  section  38  of  the  act  of  August 
5,  1909,  is  not  upon  the  property  or  income  of  corporations,  joint  stock  com- 
panies, etc.,  but  is  a  special  excise  tax  to  be  measured  by  the  annual  net  in- 
come of  such  corporations,  etc.,  it  is  held,  conformably  to  tlie  opinion  of  the 
honorable  Attorney-General,  to  whom  the  question  has  been  submitted  — 

That  in  computing  the  amount  of  the  gross  income  corporations  owning 
United  States  bonds  should  inchide  the  interest  received  thereon,  and  that 
such  interest  should  not  be  deducted  from  the  gross  income  for  the  purpose  of 
ascertaining  the  net  income,  which  serves  as  a  basis  for  computing  the  amount 

of  taxes  to  be  paid. 

Royal  E.  Cabell, 

Commissioner. 

Approved : 

Charles  D.  Hilles, 

Acting  Secretary  of  the  Treasury. 


Appendixes.  199 


APPENDIX  F. 

(T.  D.  1588.) 
TREASURY  DEPARTMENT  REGULATION. 

Returns  of  Corpokations. 

Treasury  Department, 
Office  of  Commissioner  of  Internal  Reivenue, 

Washington,  D.  C,  January  24,  1910. 

SlE:  Your  letter  dated  the  19th  instant  lias  been  received,  in  which  you  ask 
certain  questions  relative  to  making  returns  under  the  provisions  of  section 
38,  act  of  August  5,  1909.     You  state: 

In  tlie  first  place,  relative  to  a  manufacturing  company,  in  your  paragraph 
3  on  page  8  of  the  laws  and  regulations,  you  say:  "  Cost  of  goods  manufac- 
tured shall  be  ascertained  by  the  addition  of  a  charge  to  the  account  of  the 
cost  of  goods  as  manufactured  during  the  year  of  the  sum  in  the  inventory  at 
the  beginning  of  the  year,  and  a  credit  to  the  account  of  the  sum  in  the  inven- 
tory at  the  end  of  the  year."  Does  this  mean  that  the  cost  must  be  ascer- 
tained from  the  price  of  the  raw  materials  and  the  amount  of  labor  expended, 
irrespective  of  overhead  charges,  or  should  overhead  charges  be  included  in 
the  cost,  and  should  the  addition  then  be  made  to  the  total  net  worth  of  the 
concern  as  shown  by  the  inventory  of  the  previous  year  and  that  subtracted 
from  the  net  worth  of  the  concern  at  the  end  of  the  year;  or  in  what  w^ay  is 
this  section  construed? 

In  reply,  you  are  advised  that  for  the  purpose  of  making  a  correct  return 
in  accordance  with  the  provisions  of  section  38  of  the  act  of  August  5,  1909, 
it  is  necessary  to  follow  closely  the  well-established  commercial  rules  for 
keeping  the  accounts  of  the  business  of  manufacturers.  In  keeping  such 
accounts  in  a  scientific  manner  it  is  well  understood  by  all  bookkeepers  that 
if  an  inventory  is  taken  on  December  31.  the  end  of  the  calendar  year,  tho 
credits  entered  as  balances  in  the  several  ledger  accounts  show  the  assets  that 
such  corporation  has  on  hand,  and  hence  the  instructions  in  "  Note  A"  at  the 
iKittom  of  tlie  printed  Form  037  state  that  "  the  cost  of  the  goods  manufac- 
tured shall  be  ascertained  by  an  addition  of  a  charpe  (debit)  to  the  account 
of  tlie  cost  of  the  goods  as  manufactured  during  the  year  of  the  sum  of  tho 
inventory  at  the  beginning  of  the  year."  All  credit  balances  above  referred  to 
are  transferred  to  the  debit  side  of  such  accounts  when  the  same  are  reopened 
on  commencing  business  on  the  first  of  the  year,  and  the  "addition  of  a 
charge."  as  noted  above,  is  thus  made  to  the  several  accounts  that  are  debited 
with  the  cost  of  goods  manufactured  during  the  year.  The  credit  to  the 
account  is  then  made  at  the  close  of  the  year  when  the  inventory   is  taken. 

The  provisions  of  the  law  require  — 

1.  That  the  return  shall  show  the  gross  income  (profit)  received  during  the 
year,  which  is  reported  in  item  3  on  Form  037. 

2.  All  the  necessary  expenses  in  the  maintenance  and  operation  of  the  busi- 
ness and  properties,  which  include  labor,  fuel,  rentals,  insurance,  etc.,  shown 
>n  item  4. 


200        Federal  Corporation  Tax  Law. 

3.  Losses  sustained  during  the  year  and  not  compensated  by  insurance)  br 
otherwise,  including  a  reasonable  allowance  for  depreciation,  shown  in  item  5, 

a  and  b. 

4.  Interest  on  bonded  or  other  indebtedness  to  an  amount  not  exceeding  the 

paid-up  capital  stock,  shown  in  item  6. 

5.  All  sums  imposed  for  taxes  during  the  year,  shown  in  item  7. 

6.  All  amounts  received  by  it  as  dividends  upon  stock  of  other  corporations, 
etc.,  subject  to  the  tax  imposed,  as  shown  in  item  8. 

To  make  a  correct  return  it  is  necessary  for  the  accountant  to  know  — 

1.  The  exact  resources  and  liabilities  of  the  corporation,  both  on  January  1 
and  December  31  of  the  year  covered  by  the  same. 

2.  A  full  statement  of  tlie  business  transacted  during  the  year. 

For  example:  if  a  manufacturing  corporation  has  on  hand  at  the  beginning 
of  the  year  as  resources,  raw  materials,  materials  in  process,  finished  product, 
cash,  bills  receivable,  accounts  receivable,  etc.,  making  up  the  total  assets  of 
the  company,  a  business  transaction  that  results  in  exclianging  these  assets, 
or  any  part  of  tliem,  for  anything  of  equal  value  does  not  produce  income. 

Raw  materials,  being  of  the  capital  assets  of  the  company,  are  changed  5n 
form  by  the  addition  of  different  items  of  expense  to  produce  another  form  of 
asset,  the  finished  product,  and  hence  the  method  of  making  up  the  return  isi 
as  follows:  The  gross  income  from  the  manufacturing  business  reported  in 
item  3  consists  of  the  difference  between  the  cost  of  the  assets  as  material  and 
the  selling  price  of  the  assets  as  finished  product.  The  selling  price  of  the 
finished  product  is  ascertained  as  follows:  The  cost  of  the  raw  material  plus 
all  expenses  shown  in  items  4,  5,  fi,  and  7,  plus  per  cent  of  profit,  and  while 
all  these  items  of  expense  are  as  surely  a  part  of  the  finished  product  as  is  the 
value  of  the  raw  material,  yet  as  such  items  are  expenses  and  not  assets  they 
are  segregated  and  reported  as  dedtictions  in  items  4,  .5,  G,  and  7  in  order  to 
assist  the  government  ofiicer  in  his  comparison  and  verification  of  the  accuracy 

of  the  return. 

In  making  up  the  gross  income  to  be  reported  in  item  3,  the  cost  of  the 
goods  manufactured  shall  be  ascertained  by  the  addition  of  a  charge  to  the 
account  of  the  cost  of  the  goods  as  manufactured  during  the  year  of  the  sum 
of  the  inventory  at  the  beginning  of  the  year,  and  a  credit  to  tlio  account  of 
the  sum  of  the  inventory  at  the  rnd  of  the  year.  To  tliis  amount  should  1k< 
added  all  items  of  income  received  during  the  year  from  oilier  .sources,  includ- 
ing diviilends  received  on  stock  of  otlier  eorjiorations  subject  to  this  tax. 

In  making  the  inventory  on  December  \\\  of  each  year  th<'  ajipreeiation 
or  rlcpreciation  in  t'n'  v.iliic  of  the  r;uv  material  on  hand  .sliouM  be  ascer- 
tained, as  well  as  tliat  of  the  fiiii-^lnMl  prndiict.  and  this  loss  or  gain,  as  the 
case  may  be,  is  ineliuhMl  in  the  aeeouiit  of  the  closing  calendar  year.  These 
articles,  tin-  raw  mat<'riMl.  iiia1<Tial  in  process  of  manufacture,  and  the  fin- 
ished product,  constitute  nt  the  beginning  of  the  year  suecee.ling  the  inventory 
the  capital  assets  of  the  company,  and  hence,  under  th<'  rnle  in  paragraph  2. 
page  0.  of  Regulations  31.  any  increase  or  ilecrease  in  v.ilne  accruing  at  :i 
time  prior  to  .lanuary  1  of  tlie  ealen.lMV  ye.-ir  for  wliirh  return  is  made  can 
not  be  taken  as  n  part  of  the  gross  income  for  that  year,  but,  as  noted  abovo, 
Bneli    increase  or   fjecrease   in    value  should    be    included    in    the   account   of   the 

prior  calendar  year. 

The    rules,   as    hereinbefore   stated,   relative   to  manufacturing  corporations 


Appendixes.  201 

also  apply  to  mercantile  corporations,  and  it  is  not  at  all  material  in  making 
a  return  for  the  year  1909  if,  as  you  state,  the  goods  were  purchased  prior  to 
that  time.  On  January  1,  1909,  the  goods  referred  to  constitute  capital 
assets  at  the  invoiced  value,  and  only  the  profits  on  the  same,  if  sold  during 
tlie  year,  are  taken  as  gross  income,  or  if  not  all  sold  during  tiie  year  grooB 
income  is  found  by  an  addition  to  tlie  credit  side  of  the  aceuuiiL  ut  tiie  nuni 
of  the  inventory  at  the  close  of  the  year. 

When  a  book  account  is  known  to  be  worth  less  than  its  face  value  and  the 
loss  is  evidenced  by  an  entry  on  the  debit  side  of  the  loss  and  gain  account 
in  the  books  of  the  corporation,  thereby  decreasing  the  gross  profit  during  the 
year,  the  amount  of  such  loss  is  a  proper  deduction  in  item  5  of  the  return. 

The  making  of  an  accurate  return  in  accordance  with  tlie  law  and  the 
regulations  should  present  no  dilliculties  to  an  expert  bookkeeper  and  account- 
ant who  has  made  a  careful  study  of  the  subject. 

Respectfully, 

Royal  E.  Cabell, 

Commissioner. 
Mr. . 


202  Fede-ral  CoRPOKATioN   Lax  Law. 


APPENDIX  G. 

(T.  D.  1592.) 

TREASURY  DEPARTMENT  REGULATION. 

Excise  Tax. 

Treasury  Department, 
Office  of  Commissioner  of  Internal  Revenue, 

Washington,  D.  C,  February  5,  1910. 

To  collectors  of  internal  revenue  and  others: 

The  attention  of  collectors  of  internal  revenue  and  others  is  called  to  th» 
provisions  of  section  38  of  the  act  of  August  5,  1909,  requiring  corporations, 
joint  stock  companies,  associations,  and  insurance  companies,  subject  to  the 
special  excise  tax  therein  imposed,  to  render  the  prescribed  return  of  their 
gross  and  net  income  for  the  calendar  year  1909,  on  or  before  the  1st  day  of 
Marcli,  1910;  and  to  the  penalties  imposed  by  the  eighth  paragraph  of  said 
section  38  for  neglect  or  refusal  to  render  such  return,  or  for  rendering  a  false 
or  fraudulent  return. 

On  receipt  of  this  circular,  collectors  will,  so  far  as  possible,  and  without 
further  expense  to  the  government,  see  that  notice  of  these  provisions  of  the 
law  is  given  through  the  public  press  to  all  such  corporations,  joint  stock 
companies,  associations,  and  insurance  companies. 

Where  the  prescribed  returns  are  received  after  ]\Iarch  1,  1910,  the  envelopes 
bearing  postmarks  showing  the  time  of  mailing  shall  be  preserved,  aacli 
attached  to  the  return  contained  therein  and  forwarded  as  a  part  thereof  to 
this  ofTice. 

As  stated  in  article  6  of  Regulations  31,  blank  forms  for  making  tlie 
required  returns  will  be  furnished,  on  application,  by  collectors  of  internal 
revenue;  and  a  failure  to  receive  such  blanks  and  to  make  the  required  retmn 
within  the  prescribed  time  will  not  relieve  the  corporatiim,  joint  stock  com- 
pany,  association,   or   insurance   company   from   the    penalties    imposed   for  a 

failure  to  make  such  return. 

Royal  E.  Cabell, 

Comjuissiouer. 


Appendixes.  203 


APPENDIX  H. 

(T.  D.   1594.) 

TREASURY  DEPARTMENT  REGULATION. 

Excise  Tax  —  Publicity  Clause. 

Tkeasuby  Department, 
Office  of  Commissioner  of  Internajl  Revenue, 

Washington,  D.  C,  February  17,  1910. 
To  all  collectors  of  internal  revenue,  agents,  employees,  and  others  concerned: 
Many  communications  have  been  received  at  tliis  ofllce  making  inquiry  as 
to  how  the  returns  of  corporations,  joint  stock  companies,  associations,  and 
insurance  companies,  made  as  required  under  the  provisions  of  the  corporation 
excise-tax  law  (section  38  of  the  tariff  act  of  August  5,  1909),  were  to  l)i9 
handled  in  the  office  of  the  Commissioner  of  Internal  Revenue,  and  whether 
or  not  they  were  to  be  open  to  general  inspection. 

The  law,  paragraph  6,  on  this  subject  is  as  follows: 

6.  When  the  assessment  shall  be  made,  as  provided  in  this  section,  the 
returns,  together  with  any  corrections  thereof  which  may  have  been  made  by 
the  commissioner,  shall  be  filed  in  the  office  of  the  Commissioner  of  Internal 
Revenue  and  shall  constitute  public  records  and  be  open  to  inspection  as  such 

Congress  appropriated  $100,000  to  carry  into  efTect  the  provisions  of  tlie 
law.  Under  general  statutes  no  portion  of  this  appropriation  is  available  for 
use  in  the  District  of  Columbia.  The  returns  can  not  be  open  to  general 
inspection  in  the  District  of  Columbia  without  the  expenditure  of  a  substan- 
tial sum  of  money.  If,  therefore,  it  was  tlie  intent  of  Congress  to  make  tliese 
returns  open  to  general  inspection,  it  will  be  necessary  for  it  to  appropriate 
a  sum  sufficient  to  cover  the  necessary  expenses.  Until  this  is  done  this 
bureau  rules  that  the  returns  made  under  this  law  are  to  be  handled  just  as 
returns  made  under  other  internal  revenue  statutes. 

Any  person,  therefore,  other  than  the  taxpayer  making  the  return,  or  hia 
duly  appointed  agent  or  attorney,  who  desires  to  see  such  return  shall  make 
written  application  to  the  Secretary  of  the  Treasury,  who  in  iiis  discretion 
will,  upon  a  proper  showing  of  cause,  approve  such  request.  A  request  tlius 
approved  should  then  be  presented  to  the  Commissioner  of  Internal  Revenue, 
who  will  thereupon  permit  the  return  in  question  to  be  seen  by  the  applicant 
upon  such  conditions  as  the  Secretary  of  the  Treasury  shall  have  imposed. 

Royal  E.  Cabell, 

Conim  issioner. 
Approved : 

Charles  D.  Norton, 

Acting  Secretary  of  the  Treasury. 


*  "204  Federal  (jorpokation   Iax  Law. 


APPENDIX  I. 

(T.  D.  1595.) 
TREASURY  DEPARTMENT  REGULA.TION. 
Special  Excise  Tax. 
Indebtedness  Secured  by  Mortgage  on  Real  Estate  Purchased  by  Corpora- 
tions. 

Treasury  Department, 
Office  of  Commissioner  of  Internal  Revenue, 

^\ashingxon,  D.  C,  February  28,  1910. 

To  the  collectors  of  internal  revenue  and  others  concerned: 

In  an  opinion  rendered  by  the  Attorney  General  to  the  Secretary  of  the 
Treasury  on  the  question  of  interest  on  indebtedness  secured  by  mortgages  on 
real  estate,  which  real  estate  is  owned  by  corporations,  it  is  held  that,  under 
the  provisions  of  the  statute,  interest  can  be  allowed  as  a  deduction  only  to 
the  amount  of  the  paid-up  capital  stock,  and  that  where  a  company  purchas<'S 
real  estate  and  assumes  the  indebtedness,  this  indebtedness  stands  on  the 
same  footing  as  any  other.  The  Attorney  General  holds,  however,  that  where 
a  company  purchases  merely  the  equity  in  real  estate  and  does  not  assume 
outstanding  indebtedness  evidenced  by  mortgages  against  the  corpus  of  the 
property,  that  such  prior  outstanding  mortgages  are  not  indebtedness  con- 
templated under  the  statute,  as  such  obligations  do  not  constitute  indebtedness 
of  the  company  itself;  consequently  interest  on  such  mortgages  can  be  allowed 
as  a  charge  required  to  be  made  as  a  condition  to  the  continued  use  or  posses- 
sion of  property. 

Royal  E.  Cabell, 

Commissioner. 


AppEJMuixjis.  205 


APPENDIX  J. 

(T.  D.  1600.) 

(Foreign  steamship  companies  engaged  in  transporting  freight  or  passengers 
between  American  ana  foreign  ports.) 

Treasuby  Department, 
Office  of  Commissioner  of  Internal  Revenite, 

Washington,  D.  C,  March  14,  1910. 
To  collectors  of  internal  revenue  and  others  concerned: 

In  an  opinion  rendered  by  the  Attorney-General,  to  whom  the  question  was 
referred,  it  is  lield  that  as  the  provisions  of  section  38  of  the  act  of  August  5, 
1909,  imposing  a  special  excise  tax,  are  made  applicable  to  corporations  organ- 
ized under  the  laws  of  a  foreign  country  and  receiving  income  from  business 
transacted  and  capital  invested  in  the  United  States,  these  provisions  include 
foreign  steamship  companies  having  agencies  in  this  country  and  engaged  in 
the  business  of  transporting  passengers,  freight,  or  mail;  that  as  the  tax 
80  imposed  is  not  upon  the  property  of  the  corporation  or  the  income  derived 
therefrom,  but  is  "  a  special  excise  tax  with  respect  to  the  carrying  on  or 
doing  of  business,"  such  tax,  as  applied  to  the  business  so  carried  on  by  such 
foreign  steamship  companies  is  not  upon  exports  or  upon  the  income  derived 
from  the  transportation  of  such  exports. 

Royal  E.  Cabeix, 

Com/missioner. 


206         Federal  Cokpokation  Tax  Law. 


APPENDIX  K. 

(T.  D.  1606.) 

Special  Excise  Tax. 

Tkeasuby  Department, 
Office  of  Commissioner  of  Internal  Revenue, 

Washmgton,  D.  C,  March  29,  1910. 

The  following  synopsis  of  decisions  made,  from  time  to  time,  on  questions 

relating  to  the  special  excise  tax  imposed  by  section  38,  act  of  August  5,  1909, 

on  corporations,  joint  stock  companies,  associations  and  insurance  companies, 

is    published    for    the    information    of    internal-revenue    officers    and    others 

concerned. 

Royal  E.  Cabell, 

Convmissioner. 

Class  of  Corporations,  etc.,  Subject  to  Tax. 

1.  The  tax  imposed  by  the  act  applies  to  all  corporations,  etc.,  described, 
except  those  specificallj'  exempted,  without  reference  to  the  kind  of  business 
carried  on. 

2.  Every  corporation,  etc.,  not  specifically  enumerated  as  exempt,  shall 
make  the  return  required  by  law,  although  its  net  income  during  the  year  may 
not  have  exceeded  $5,000. 

3.  Corporations  claiming  special  exemption  should  neverthele.ss  make  return 
(in  blank  if  desired)  accompanied  by  a  statement  setting  forth  the  ground 
on  which  exemption  is  claimed. 

4.  Corporations,  etc.,  organized  during  the  year  or  going  into  liquidation 
during  the  year  .should  nevertheless  render  a  sworn  return  on  tlie  prescribnd 
form.  The  tax  imposed,  however,  is  held  not  to  apply  to  corporations  whicri 
went  out  of  existence  prior  to  the  passage  of  the  act. 

5.  Where  company  has  dissolved  and  tlic  required  return  i.s  not  made  by  its 
officers,  such  return  will  be  prepared  by  eonunissioner. 

G.  Where  corporation  has  gone  into  bankruptcy,  returns  in  such  cases  to  be 
made  by  trustee  in  bankruptcy. 

7.  Railroad  ooiiipariics  operating  leased  or  purchased  lines  to  include  all 
receipts  derived  thcn-from,  and  if  boniled  indeljfcdness  has  been  assumed  m;«y 
deduct  interest  thereon  to  an  amount  not  excoe<iing  its  own  paid  up  capital 
etock.  If  such  subsidiary  companies  receive  income  in  the  way  of  rentals  etc.. 
return  to  be  also  rn:ul<'  liy  such  companies. 

8.  Corporations,  «'tc.,  organized  nn<ler  the  authority  f)f  the  T'nitod  States 
or  .Tpy  St:ito  or  T('rritf)r-\'  tlKToof.  or  Alaska,  or  the  District  of  Columbia, 
to  include  in  tli'ii'  return^  imt  ciily  tlie  iiicotne  derived  from  the  business 
rarrifi  (ui  within  thf  (oridin'-;  of  tli<'  I'nited  States,  Imt  incdiiie  received  from 
business  transacted   in  any   foreign  conntry  as  well 

n.  f  ftrpoiat ir)ns  havint'  brimeli  or  snlisjdiary  companies   to  include   in   tlieir 
returns  the  income  of  all  such  companies. 


Appendixes.  207 

10.  Foreign  companies  having  several  brancli  oflices  in  the  United  States 
should  each  designate  one  of  such  branches  as  its  principal  ollice,  and  should 
also  designate  the  proper  ollicers  to  make  the  required  return. 

11.  Where  a  consolidation  of  two  or  more  corporations  has  been  efTected 
during  the  year,  and  each  or  any  such  corporation  subsequent  to  such  consoli- 
dation collects  prior  existing  debts,  each  such  corporation  should  also  make 
separate  return  and  include  therein  all  such  collected  debts,  as  also  all  income 
received  during  the  year  prior  to  the  date  of  consolidation. 

12.  "  Principal  place  -of  business  "  is  held  to  mean  the  principal  office  where 
the  company  keeps  its  books  from  which  the  required  return  is  to  be  pre- 
pared and  not  the  place  where  the  operating  plant  is  located. 

13.  As  the  law  specifically  provides  that  the  tax  imposed  shall  be  computed 
on  the  net  income  during  each  calendar  year,  returns  of  income  based  on  any 
period  other  than  the  calendar  year  cannot  be  accepted. 

14.  Full  amount  of  stock,  as  represented  by  the  par  value  of  the  shares 
issued,  to  be  regarded  as  the  paid-up  capital  stock,  except  when  such  stock  is 
assessable  on  account  of  deferred  payments,  in  which  case  the  amount  actually 
paid  on  such  shares  will  constitute  the  actual  paid-up  capital  stock  of  the 
corporation. 

15.  Capital  stock  is  held  to  include  both  preferred  and  common  stock. 

16.  Surplus  and  undivided  profits  not  to  be  included  in  capital  stock. 

17.  Holding  companies,  known  as  "  Voting  Trusts,"  receiving  only  dividends 
on  stock  held,  and  having  no  capital  stock,  etc.,  not  liable. 

18.  Mutual  savings  banks  having  no  capital  stock  not  liable  to  tax  imposed 
(Opin.  Atty.-Gen.  Feb.  14,  1910). 

19.  Co  operative  dairies  not  issuing  stock  and  allowing  patrons  dividends 
based  on  butter  fat  in  milk  furnished  not  liable. 

20.  Foreign  steamship  companies  having  no  office  in  the  United  St^ites 
whose  vessels  only  occasionally  touch  at  ports  in  the  United  States  not 
regarded  as  doing  business  in  this  country  within  the  meaning  of  the  statute. 

21.  Companies  organized  in  Porto  Rico,  and  not  engaged  in  business  in  the 
United  States  not  subject  to  tax. 

22.  Corporations  owning  sugar  or  other  plantations  and  disposing  of  the 
products  thereof  not  entitled  to  exemption  as  agricultural  organizations. 

23.  Corporations  organized  to  sell  provisions,  etc.,  to  stockholders  and 
others  not  exempted. 

24.  Corporations  organized  for  the  purpose  of  holding  real  estate,  to  make 
return  of  income  derived  from  the  property  so  held. 

25.  National  banks  do  not  come  within  any  of  the  exemptions  named  in 
the  act. 

26.  "Agricultural  organizations "  held  not  to  come  within  the  statutory 
exemption,  unless  their  chief  object  is  the  promotion  or  advancement  of  agri- 
cultural interest,  and  no  part  of  the  net  income  inures  to  the  benefit  of  their 
stockholders. 

27.  Music  hall  association  regarded  as  an  insurance  company  and  not  as 
an  agricultural  association,  and  therefore  liable  to  tax. 

28.  Exemption  in  favor  of  fraternal  beneficiary  associations  does  not  apply 
to  mutual  fire  insurance  companies. 


iiOS  Federal  Corporation  Tax  Law. 

29.  Limited  partnership,  if  organized  for  profit  and  having  a  capital  stock 
represented  by  shares,  although  no  "  certificates  of  stock "  are  issued,  are 
liable  to  the  tax  imposed.      (Opin.  Attl.-Gen.  Feb.  14,  1910.) 

30.  Building  and  loan  associations  not  exempt  if  having  a  capital  and  loan- 
ing to  others  than  members,  i.  c,  if  doing  a  business  akin  to  banking  business. 

31.  Building  and  loan  associations  issuing  stock  on  which  dividends  are 
guaranteed,  held  to  be  liable  to  tax  imposed. 

32.  Interest  received  on  government  bonds  to  be  included  in  gross  income. 
(Opin.  of  Atty.  Gen.  Jan.  13,  1910.) 

33.  Returns  should  be  signed  and  verified  by  two  of  the  officers  designate-.l 
in  the  law.  Signing  of  one  person  holding  two  such  offices  not  permitted. 
Agents  for  foreign  steamship  companies  may  sign  the  requi/ed  returns,  if  so 
authorized  by  their  companies. 

34.  Returns  not  required  to  have  corporate  seal  affixed. 

35.  Returns  filed  with  deputy  collector  regarded  as  having  been  filed  with 
collector. 

3G.  No  form  of  protest  prescribed.  Any  form  of  protest  sufficient  if  filed 
before  payment  of  tax.     Right  of  protest  not  to  be  denied. 

Inventories,  Accounts,  etc. 

37.  Where  an  inventory  or  its  equivalent  was  not  taken  at  the  close  of  'the 
year  1908,  a  supplemental  statement  showing  such  inventory  approximately 
must  be  submitted  with  the  return  on  the  regular  form.  Such  supplemental 
statement  shall  be  verified  under  oath  by  the  treasurer  or  principal  financial 
officer  submitting  the  same.      (T.  D.  1578.) 

38.  Cost  of  manufactured  articles,  or  articles  in  process  of  manufacture, 
held  to  include  original  cost  of  materials  used,  plus  cost  of  labor,  etc. 

39.  Mortgaged  real  estate  should  be  inventoried  at  its  full  value  and  amount 
of  mortgage  reponted  as  indebtedness. 

40.  Profits  realized  on  sale  of  real  estate  during  year,  also  increase  in  value 
of  un.sold  property,  to  be  included  in  income. 

41.  Receipts  during  year  from  lands  sold  on  instalment  to  be  included  in 
gross  income  for  that  year. 

42.  Receii)ts  from  sale  of  patent  rights  to  be  included  in  income. 

43.  No  particular  system  of  bookkeeping  or  accounting  will  be  required  by 
the  department.  However,  the  business  transacted  by  corporations,  etc.,  must 
be  so  recorded  that  each  and  every  item  therein  set  forth  may  he  readily 
verified  by  an  examination  of  the  books  and  accounts  where  such  examination 
is  deemed  necessary. 

Deductions,  Expenses,  etc. 

44.  It  is  immaterial   whether   the  deductions  are  evidenced  by  actual   dis 
bursements  in  cash,  or  whether  evidenced  in  such  other  way  as  to  be  properly 
acknowlrdged    by   the   corporate   officers   and    so   entered    on    the  books   as    to 
constitute  a  liability  against  the  assets  of  the  corporation,  etc.,  making  the 
return. 

45.  Mortgage  indebtedness  on  real  ea-tate,  if  assumed  by  the  corporation 
ncquiring  such  real  estate,  to  be  included  in  the  indebtedness  of  the  corpora- 
lion.  But  if  not  so  assumed  and  remains  only  as  a  lien  on  the  property, 
interest  paid  thereon  may  be  deducted  as  a  charge,  "  made  as  a  condition  to 


Appendixes.  209 

the  continued  use  or  possession  of  tlie  property."      (Opin.  Atty.-Gen.  Feb.  21, 
1910.) 

46.  Cost  of  erecting  building,  if  included  in  lease  under  whicii  property 
is  lield  by  company,  is  a  proper  deduction,  to  be  prorated  according  to  time 
lixed  by  lease. 

47.  General  expenses  such  as  coal,  ship  stores,  etc.,  of  foreign  steamship 
companies,  to  be  prorated  as  provided  in  act  for  interest  deductions. 

48.  Amount  received  by  nursery  companies  from  sales  of  trees,  etc.,  less 
amount  expended  for  seedlings  and  young  trees,  to  be  included  in  gross  income. 
Amount  expended  for  labor,  salesmen,  etc.,  to  be  deducted  as  expenses. 

49.  Commissions  allovi'ed  salesmen,  paid  in  stock,  may  be  deducted  as 
expense  if  so  chai'ged  on  books. 

50.  Sales  of  stock  and  bonds  are  regarded  as  sales  of  capital  assets  and 
should  be  so  accounted  for.  (Art.  2,  regs.  31.)  But  proceeds  derived  from 
sale  of  bonds  used  in  defraying  ordinary  and  necessary  expenses  are  a  proper 
deduction  in  determining  the  company's  net  income. 

51.  Stock  issued  in  payment  of  property  purchased,  represents  capital, 
investments,  and  notes  issued  during  the  year  represent  indebtedness.  Cor- 
porate funds  applied  to  the  payment  of  outstanding  notes  not  a  proper  deduc- 
tion in  ascertaining  net  income. 

52.  Amounts  expended  in  betterments  or  repairs  not  a  proper  deduction.  A 
reasonable  allowance  for  depreciation  of  stock,  etc.,  is  permissible. 

53.  Betterments  and  repairs  not  proper  deductions  as  expenses,  the  former 
being  additions  to  the  capital  assets  of  the  company  and  the  latter  being 
oflTset  by  allowance  for  depreciation. 

54.  Cost  of  replacing  old  rails,  structures,  etc.,  not  regarded  as  ordinary 
and  necessary  expenses.  Depreciation  during  the  year  will  be  allowed,  how- 
ever, in  such  cases. 

55.  Dividends  received  by  corporations  on  stock  of  other  corporations 
whose  net  income  does  not  exceed  $5,000  is  nevertheless  a  proper  deduction 
under  the  law.      (Opin.  Atty.-Gen.  Jan.  24,  1910.) 

56.  Dividends  received  on  stock  of  foreign  corporations  not  subject  to  tax 
not  a  proper  deduction. 

57.  Dividends  paid  employees  in  lieu  of  wages  not  proper  deduction  as 
expenses. 

58.  Royalties  on  patent  rights  to  be  reported  as  income.  Allowance  for 
depreciation  of  patents  expiring  during  year,  however,  will  be  allowed. 

59.  Pensions  paid  or  gifts  made  to  employees  are  gratuities,  and  not  "  ordi- 
nary and  necessary  expenses." 

60.  Wlhere  allowances  on  account  of  salaries  are  deemed  excessive  and  for 
the  purpose  of  evading  the  tax  due  investigation  will  be  made,  and  if  the  facts 
warrant,  prosecution  will  follow. 

61.  Interest  paid  on  time  deposits  subject  to  check  constitutes  a  proper 
deduction  from  the  amount  of  gross  income  during  the  year. 

62.  Interest  on  portions  of  bonded  or  other  indebtedness  bearing  different 
rates  of  interest  may  be  deducted  from  gross  income  during  the  year,  provided 
the  aggregate  amount  of  such  indebtedness  does  not  exceed  the  paid-up  capital 
stock  of  the  corporation. 

63.  Interest  paid  during  the  year  on  notes  given  prior  to  January  1,  1909, 

Fed.  Corp.  Tax  —  14 


210         Federal  Corporation  Tax  Law. 

to  be  prorated.  But  interest  on  notes  given  in  1909  and  payable  subsequent 
to  December,  1909,  unless  charged  on  the  company's  books  is  not  a  proper 
deduction  from  the  income  of  that  year. 

04.  Interest  or  taxes  accruing  prior  to  the  year  for  which  return  is  mad« 
is  not  a  proper  deduction  from  the  gross  income  for  that  year. 

65.  Unearned  premiums  set  aside  by  insurance  companies  as  reserve  not  to 
be  included  as  income  until  earned. 

til).  Funds  set  aside  by  company,  for  insuring  their  own  property  not  a 
proper  deduction. 

07.  As  the  tax  imposed  is  measured  by  and  is  no.t  a  tax  upon  the  net 
receipts  of  corporations,  etc.,  interest  received  during  the  year  on  government 
bonds  is  not  a  proper  deduction  from  sucli  income  in  determining  the  amount 
of  the  tax  due.      (Opin.  Atty.  Gen.  T.  D.  1583.) 

68.  State,  county  or  municipal  taxes  paid  during  the  year  a  proper  deduc- 
tion in  ascertaining  tlie  not  income  of  corjiorations. 

69.  Import  duties  or  taxes,  if  included  in  arriving  at  cost  of  goods,  are  not 
deductible  under  the  head  of  taxes  paid  during  the  year. 

70.  Bad  debts,  if  so  charged  off  the  company's  books  during  the  year,  ht^ 
proper  deductions.  But  such  debis,  if  subsequently  collected,  must  be  treated 
as  income. 

Depreciation. 

71.  Where  increase  or  decrease  during  the  year  in  the  value  of  real  estate 
acquired  in  previous  years,  sold  or  held  for  sale,  cannot  be  accurately  deter- 
mined, such  increase  or  decrease  may  be  j)rorated,  as  provided  by  re^rulations 
in  cases  of  sale  of  capital  assets. 

72.  Depreciation  in  value  of  mines  by  the  removal  of  ore,  if  not  other- 
wise ascertainable,  may  be  prorated  as  in  the  case  of  sales  of  capital  assets. 

73.  Depreciation  in  value  of  mines  by  the  removal  of  ore.  if  in  excess  of  five 
per  cent,  of  investment,  to  be  explained  in  return  rendered. 

74.  Estimated  depreciation  in  oil  or  gas  wells,  buildings,  machinery,  etc., 
to  be  stated  in  detail,  if  exceeding  live  per  cent,  of  value  as  previously  inven- 
toried. 

75.  Cori)oritinns  leasing  mines  and  p«iying  royalties  on  ore  mined  not  enti- 
tled to  deduction  for  depreciation.  But  corporations  owning  mines  are 
entitled  to  allowance  for  d<'prefiation  liased  on  f:iir  estimate,  etc. 

76.  Removal  of  tiinlwr  from  timber  lands,  wliile  depleting  the  lands  to  the 
extent  of  such  n-moxal,  is  regarded  as  a  charge  in  the  form  of  assets,  and 
not  a  (li'prriialioii  within  the  meaning  of  the  act. 

77.  l)<'<lnction  on  account  of  depreciation  of  property  must  be  based  on  life 
time  of  property,  its  cost,  value  and  use. 

78.  Voluntary  removal  of  l)iiil(iings,  etc.,  for  juirpose  of  improvements  not 
regarded  aH  loss  or  depreciation,  and  no  deduction  therefor  should  be  made. 

70.  Depreciation  of  company's  stock  a  loss  to  the  stockholders,  but  not  a 
loes  to  the  company  issuing  the  same,  and  therefore  not  a  proper  deduction. 

Royal  K.  ('Anp:i.i„ 

Commissioner. 


Appendixes.  lill 


APPENDIX  L. 

(T.  D.  1611.) 

TREASURY  DEPARTMENT  REGULATION. 

Excise  Tax. 

Treasury  Department, 
Office  of  Commissioner  of  Internal  Re\-enue, 

Washington,  D.  C,  April  4,  1910. 

To  collectors  of  internal  revenue,  revenue  agents,  and  other  internal  revenue 
officers : 

It  appears  that  there  are  in  Massacliusetts,  and  perhaps  elsewhere,  various 
organizations  known  as  "  associates,"  "  trusts,"  or  "  real-estate  trusts,"  wliioh 
are  not  organized  under  a  charter  but  are  formed  by  an  agreement  and  declara- 
tion of  trust.  It  appears  that  the  title  to  the  property  or  business  owned  or 
operated  by  these  organizations  is  vested  in  one  or  more  trustees,  and  certifi- 
cates are  issued  to  parties  in  interest  as  are  shares  of  stock  of  incorporated 
concerns,  the  certificates  being  traded  in  as  are  shares  of  stock  and  the  trus- 
tees being  elected  and  their  successors  cliosen  as  are  directors  in  any  corpora- 
tion regularly  chartered.  The  organization  is  one  for  profit  and  it  possesses 
all  of  the  essential  elements  of  any  joint-stock  company. 

In  reply  to  a  request  from  the  Secretary  of  the  Treasury  as  to  the  status  of 
these  organizations,  in  regard  to  the  corporation  excise-tax  provisions  of  the 
tariff  act  of  August  5,  1909,  the  honorable  Attorney-General  advises  that  these 
concerns  are  joint  stock  companies  or  associations  organized  for  profit  and 
having  a  capital  stock  represented  by  shares,  and  are  amenable  to  the  pro- 
visions of  tlie  corporation  excise-tax  law. 

Collectors   of    internal    revenue,    in   whose   districts   there   may   be    located 

organizations  of  this  character,  will  see  that  such  organizations  comply  with 

the  provisions  of  thia  law. 

Royal  E.  Cabell, 

Commissioner. 


212        Federal  Corporation  Tax  Law. 


APPENDIX  M. 

(T.  D.  1615.) 

TREASURY  DEPARTMENT  REGULATION. 

Treasury  Department, 
Office  of  Commissioner  of  Internal  Re\'enite, 

Washingtoti,  D.  C,  Ai}ril  15,  1910. 

To  collectors  of  internal  revenue  and  others  concerned: 

Under  date  of  April  2d,  1910,  the  Attorney-General  rules  in  answer  to 
queries  presented  by  tlie  Secretary  of  the  Treasury,  that  any  corporation  which 
was  engaged  in  business  after  the  approval  of  the  act  of  August  5tli,  1909.  is 
amenable  to  the  excise  tax  provided  for  under  section  38  of  the  act,  to  the  effect 
that  a  corporation  engaged  in  business  subsequent  to  August  5th,  1909,  and 
hiwfully  dissolving  itself  and  distributing  its  assets  prior  to  December  31, 
1909,  is  immaterial. 

The  Attorney-General  rules  that  where  there  is  no  provision  in  the  corpora- 
tion excise  tax  which  creates  a  lien  upon  the  pi'operty  of  a  corporation  subject 
to  the  tax,  section  3186,  Revised  Statutes  of  the  United  States,  as  amended  by 
the  act  of  March  1,  1899,  which  provides  that,  "  If  any  person  liable  to  pay 
any  tax,  neglects  or  refuses  to  pay  the  same  after  demand,  the  amount  shall 
be  a  lien  in  favor  of  the  United  States  from  the  time  when  the  assessment  list 
was  received  by  the  collector,  except  when  otherwise  provided,  until  ])aid  wiili 
interest,  penalties  and  costs  that  may  accrue  in  addition  thereto  upon  tlu^ 
property  and  rights  belonging  to  such  person,"  is  applicable  and  the  lien  of 
this  corporation  excise  tax,  attaches  as  provided  tlierein. 

If  the  corporation  has  distributed  all  its  assets  and  become  dissolved  in  tlie 
manner  provided  for  by  law,  prior  to  tlie  time  when  the  list  of  assessments 
cpnie  into  tlie  hands  of  the  collector  at  that  time  there  would  be  no  corporation 
nor  assets,  and  nothing  upon  whicli  the  lien  could  attacli,  and  consecjuently 
no  lien  would  then  exist  to  secure  paynu-nt  of  the  taxes.  In  sucli  event  the 
government  may  resort  to  the  common  law  method  of  collecting  the  tax  in 
accordance  with  the  holding  of  the  Supreme  Court  of  the  United  States  in 
Savings  Bank  r.  United  States,  19  Wall.  227.  240.  This  decision  holds  that 
the  dissolution  of  a  corporation  does  not  extinguish  its  liabilities,  and  conse 
qncntly  the  government  may  in  such  event  collect  the  tax  by  pursuing  the 
assets  of  the  corporation  into  the  hands  of  the  stockholders,  or  into  the  hands 
of  any  person  not  a  hnna  fide  purchaser  in  the  same  manner  by  which  any 
other  creditor  might  obtain  satisfaction  of  his  debt. 

Royal  E.  Cahei-i,, 

Commiasioner. 


ApPEiSTDIXES.  213 


APPENDIX  N. 

(T.  D.  1(310.) 

Divulging  Information  Obtained  by  Internal  Revenue  Officers  in^  Their 
Official  Capacity  —  Decision  in  Stegall  v.  Thurman. 

1.  Regulations,  force  and  effect  of.  —  Regulations  issued  by  the  Secretary 
of  the  Treasury  with  reference  to  the  internal  revenue  and  for  the  government 
of  the  officers  of  the  revenue  bureau  have  the  force  and  efTect  of  law  and  are 
as  binding  as  if  incorporated  in  tlie  statute  law  of  the  United  States. 

2.  Witnesfics  —  Information  obtained  by  internal-revenue  officers  or  agent. — 
Under  tlie  regulations  of  the  Internal -Revenue  Bureau  promulgated  with  the 
approval  of  the  Secretary  of  the  Treasury,  providing  that  officers  of  the  bureau 
"  will  decline  to  testify  as  to  facts  contained  in  tlie  records,  or  coming  to  their 
knowledge  in  their  official  capacity;  and  this  proliibition  is  hereby  extended 
to  include  also  internal-revenue  storekeepers  and  gangers  and  agents,"  a  store- 
keeper and  ganger  stationed  at  a  distillery  has  no  right  to  divulge  information 
in  regard  to  tlie  business  of  the  distiller  obtained  by  him  solely  in  his  official 
capacity  as  an  internal-revenue  officer,  even  when  called  as  a  witness  in  a  State 
court. 

3.  Habeas  corpus  —  Discharge  by  federal  court.  —  Where  an  officer  of  the 
Internal  Revenue  Bureau  is  imprisoned  for  contempt  for  a  refusal  to  testify 
in  a  State  court  or  before  a  grand  jury  with  respect  to  facts  learned  by  him  in 
his  official  capacity  whicli  he  is  prohibited  from  divulging  by  the  regulations 
of  the  bureau,  the  case  is  one  of  urgency,  in  which  a  federal  court  is  not 
required  to  await  the  final  action  of  the  State  court,  but  should  discharge  the 
prisoner  on  a  writ  of  habeas  corpus. 

Treasury  Department, 
Office  of  Commissioner  of  Internal  Revenub, 

Washington,  D.  C,  April  16,  1910. 
The  appended  decision  of  the  United  States  District  Court,  Northern  District 
of  Georgia,  in  the  case  of  Stegall  v.  Thurman,  slieriff  and  jailor,  is  published 
for  the  information  of  internal  revenue  officers  and  others  concerned. 

Royal  E.  Cabell, 

Commissioner. 

Proceedings  by  Charles  E.  Stegell  r.  R.  W.  Thurman,  Sheriff  and  Jailor, 
OF  Dade  County,  Ga.,  for  Writ  of  Habeas  Corpus  —  Decided  January 
27,  1910. 

Newman,  District  Judge.  —  Application  was  made  by  Charles  E.  Stegall, 
in  this  court,  for  the  issuance  of  a  writ  of  habeas  corpus  to  be  directed  to  R. 
W.  Thurman,  sheriff  and  jailer,  of  Dade  county,  Ga.  The  petition  of  Charles 
E.  Stegall  alleges:  That  he  was  a  storekeeper  and  ganger,  assigned  for  duty 
at  Distillery  No.  3,  of  George  W.  Cureton,  at  Rising  Fawn,  in  Dade  county, 
Ga.  That  he  was  subprrnaed  to  appear  as  a  witness  before  the  grand  jury  of 
the  Superior  Court  of  Dade  county,  to  testify  on  behalf  of  the  State  touching 


21-1  Fedekal  Co:jpobation  Tax  Law. 

the  operations  of  said  distillery.  That  he  declined  to  answer  certain  questioTvg 
propounded  to  hiiu,  upon  the  ground  that  all  the  knowledge  he  had  as  to  the 
operation  of  Cureton's  distillery  was  obtained  and  came  to  him  from  the 
records  of  the  Internal  Revenue  Department,  or  was  obtained  by  him  solely  and 
only  in  his  official  capacity  as  storekeeper  and  ganger.  Thereupon,  and  on 
account  of  his  declining  to  answer,  he  was  committed  for  contempt,  and  was 
in  jail  when  the  writ  was  issued.  Return  was  made,  the  body  of  the  petitioner 
produced,  and  an  answer  filed  by  the  sheriff. 

Upon  the  hearing,   an  agreement  was  made  by  counsel   as  to  some  of  the 
facts,   and   brief   testimony   taken   as   to   others.     It  is  agreed   now   that   the 
question  put  to  Stegall  before  the  grand  jury,  and  on  wliich  the  present  deci- 
sion turns,  was  this:     Referring  to  George  W.  Cureton's  distillery.  "What  is 
being  manufactured   at  that  place?"  and  the  inquiry  is  whetlier,  under   the 
facts,  Stegall  should  have  been  required  to  answer  that  question,  or  whether, 
in  refusing  to  answer,  he  exercised  a  right  under  the  laws  of  the  United  States 
and  the  rules  and  regulations  of  the  Treasury  Department,  which  right  would 
authorize  his  discharge  under  this  habeas  corpus  proceeding. 
»*«»**»»♦♦ 
It  is  not  denied,  as  I  understand  it.  that  the  only  knowledge  Stegall  had  of 
what  was  being  done  at  Cureton's  distillery  was  knowledge  which  he  obtaineii 
while  there  in  his  official  capacity  as  storekeeper  and  ganger,  and  it  is  not 
claimed    that   Stegall    had   auy    knowledge    except   such    as    he   obtained    while 
there  officially.     The  contention   on  behalf  of   the  slieriff  is,  notwithstanding 
the  fact  that  Stegall  was  at  the  distillery  only  in  his  official  capacity,  that  he 
had  personal  knowledge,  knowledge  as  an  individual,  of  what  was  being  done 
at  the  distillery  —  that  is  to  say,  the  eont<'ntion  is  he  saw  as  an  individual, 
notwithstanding  his  presence  as  an  official.     Is  tliis  contention  sound?     That 
is  the  question  for  determination  here. 

Section  .3107,  Revised  Statutes  of  the  United  States  (U.  S.  Comp.  St.  1901, 
p.  2058),  is  as  follows: 

(Section  3167,  R.  S.,  quoted;  sections  161,  2.')1.  and  .3215,  R.  S.,  quoted; 
Regulations  contained  in  No.  12,  revised,  issued  by  the  Commissioner  of  In- 
ternal Revenue  and  ap])roved  by  the  Secretary  of  the  Treasury,  qnot(>d  ;  Inter- 
nal Revenue  Circular  No.  583,  October  10.  1!)00  (T.  D.  226).  -  Forbidding  dis- 
closure of  information  contained  in  official  record."  (juoted.  Boske  t'.  Comin- 
gore,  177  U.  S.  450,  referred  to.) 

It  tiKiv  lie  proper  to  incpiire.  first,  wliether  these  regulations  are  authorized 
by  law,  and  in  accordance  with  law.  It  is  fully  settled  in  many  eases  that  the 
regulations  issued  by  the  Secretary  (if  the  Treasury  with  reference  to  the 
question  of  intcrniil  revenue,  niid  for  the  governnicTit  (if  the  officers  of  the 
Revenue  Departimiit.  Imvc  tlic  f'lrcc  and  effect  of  law,  and  are  as  binding  ns  if 
incorporated  in  (lie  statute  law  of  the  United  States.  United  States  r.  Bar- 
rows, 1  Abb.  {['.  S.)  351;  24  Fed.  Cas.  No.  I4,.52n:  United  States  v.  Ilutton, 
10  Ren.  (U.  S.)  208;  20  Fed.  Cas.  No.  15.433;  In  re  Iluttman  (D.  C).  70  Fed. 
Rep.  (i!l!t;  In  ic  Weeks  (O.  C).  82  Fed.  Kcp.  729;  United  States  ex  rel.  Flynn 
r.  lMirl!li;irt  iC.  {'.).  100  Fed.  Rep.  '.ill;  In  re  l.aniberton  ( D.  C),  124  Fox\. 
Rep.  4  10;  I'.oskc  r.  Comin'jore,  supra;  \',\  parte  I'ecd,  100  U.  S.  13;  25  L.  Ed. 
5.38;  Crati.d  r.  United  States,  4  How.  80,   II    L.  Kd.  884. 

In  concluding  the  opinion  in  I'.oske  v.  Comingore.  Hupra,  Mr.  Justice  Harlan 


Appendixes.  21 


says,  in  reference  to  the  promulgation  of  regulations  by  the  Secretary  of  the 
Treasury  for  collectors  of  internal  revenue: 

In  determining  whether  the  regulations  promulgated  by  him  are  consistent 
with  law,  we  must  apply  the  rule  of  decision,  which  controls  when  an  act  of 
Congress  is  assailed  as  not  being  within  tiie  powers  conferred  upon  it  by  the 
Constitution  —  that  is  to  say,  a  regulation  adopted  under  section  101  of  tlie 
Revised  Statutes  should  not  be  disregarded  or  annulled  unless,  in  the  judg- 
ment of  tlie  court,  it  is  plainly  and  palpably  inconsistent  with  law.  Those 
who  insist  tliat  such  a  regulation  is  invalid  must  make  its  invalidity  so  mani- 
fest that  the  court  has  no  choice  e.xcept  to  hold  that  the  secretary  has  ex- 
ceeded his  authority,  and  employed  means  that  are  not  at  all  appropriate  to 
the  end  specified  in  the  act  of  Congress. 

I  do  not  understand  it  to  be  contended  here,  however,  that  these  regula- 
tions are  inconsistent  with  law.  No  attack  is  made  in  argument  upon  these 
regulations.  What  is  insisted  strongly  and  earnestly  is  that  the  individual 
may  be  separated,  as  it  were,  from  the  official.  What  he  discovers  by  the  use 
of  his  senses,  what  he  sees  with  his  eyes,  it  is  urged,  he  may  tetify  to;  that 
he  knows  it  as  an  individual,  although  as  an  official  he  was  on  the  spot  and 
acting  in  the  discharge  of  his  duty  as  such  official. 

In  the  last  regulation  referred  to  (No.  12,  of  April  18,  1004)  it  will  be  per- 
ceived that,  among  other  things,  it  is  said: 

They  will  decline  to  testify  as  to  facts  contained  in  the  records,  or  coming 
to  their  knowledge  in  their  oflicial  capacity;  and  this  prohibition  is  hereby 
extended  to  include  also  internal  revenue  storekeepers  and  gaugers  and  agents. 

Assuming  this  regulation  to  be  within  the  authority  of  the  Secretary  of  the 
Treasury  under  the  statute,  and  thereby  becoming  law  and  controlling  on 
storekeepers  and  gaugers,  can  a  storekeeper  and  ganger  testify  to  facts  he 
ascertains  at  a  distillery,  when  he  is  there  only  in  his  capacity  as  a  store- 
keeper and  ganger? 

The  District  Courts  have  passed  on  similar  questions  on  several  occasions. 
Jn  re  Huttmann,  supra,  was  decided  by  Judge  Williams  in  the  District  Court 
of  Kansas.  This  was  a  habeas  corpus  case,  Huttmann  being  a  deputy  collector 
of  internal  revenue  and  having  been  committed  for  contempt  for  declining  to 
answer  certain  questions  propounded  to  him  in  the  State  court.     *     *     * 

In  re  Weeks,  supra,  was  a  decision  by  Judge  Wheeler  in  the  District  Court 
of  Vermont.  This  was  a  habeas  corpus  case  also.  Weeks  being  a  deputy  col- 
lector of  internal  revenue  in  Vermont.  He  was  called  upon  to  testify  in  the 
State  court  as  to  the  purchase  by  certain  persons  of  a  retail  liquor  dealer's 
tax  stamp.     Weeks,  declining  to  answer,  was  committed  for  contempt.    .     .     . 

In  re  Land)erton.  supra,  was  also  a  habeas  corpus  case  before  Judge  Rogers 
in  the  western  district  of  Arkansas.     *     *     * 

The  Comingore  case  was  originally  decided  by  Judge  Evans  in  the  District 
Court  of  Kentucky  (In  re  Comingore  (D.  C),  90  Fed.  552),  and  was  affirmed 
by  the  Supreme  Court  in  Boske  r.  Comingore  (177  U.  S.  459,  20  Sup.  Ct.  701; 
44   L.    Ed.    840). 

In  re  Hirsh  (C.  C.)  (74  Fed.  Rep.  928)  is  not  in  harmony  with  the  fore- 
going decisions,  in  that  it  holds  that  a  deputy  collector  of  internal  revenue 
should  be  required  to  produce  his  records  before  the  court;  but  this  case  is 


216         Federal  Corpoeation  Tax  Law. 

undoubtedly   overruled   by   the    decision   of   the    Supreme   Court   in    Boske  v. 
Comingore,  supra. 

The  foregoing  authorities  seem  conclusive  of  the  present  inquiry.  They 
establish  the  proposition,  undoubtedly,  that  information  obtained  by  a  person 
solely  in  his  official  capacity  as  internal  revenue  officer  cannot  be  divulged 
by  him  even  when  called  as  a  witness  in  the  state  court.  The  method  pre- 
scribed by  the  Secretary  of  the  Treasury  for  courts  obtaining  this  information 
is  an  application  to  the  Secretary  of  the  Treasury  by  the  judge  of  the  court 
in  which  the  information  is  desired  as  to  the  operation  of  a  distillery,  when 
a  certified  copy  may  be  obtained  of  the  reports  of  the  distiller,  which  will 
show  fully  and  accurately  all  that  has  been  done  in  any  given  distillery.  *  *   * 

The  whole  question  comes  to  this:  When  a  distillery  is  being  operated,  a 
storekeeper  and  ganger  is  placed  there  to  ascertain  the  quantity  of  distilled 
spirits  made  at  the  distillery,  in  order  that  the  Government  may  collect  the 
taxes.  They  are  under  the  provisions  of  the  statute  (R.  S.,  sec.  3167)  and  the? 
regulation  of  the  Treasury  Department,  having  the  effect  of  law,  as  stated, 
that  they  shall  not  produce  any  records  or  testify  as  to  the  contents  of  records 
and,  further,  that  they  shall  not  testify  as  to  facts  "  coming  to  their  knowl- 
edge in  their  official  capacity ;  "  but  the  same  regulation  provides  that  infor- 
mation desired  as  to  the  operation  of  a  distillery  will,  \ipon  request  of  the 
court  desiring  such  information,  be  furnished  under  the  seal  of  the  Treasury 
Department.  If  a  change  is  needed,  it  must  be  made  by  Congress  or  by  the 
Secretary  of  the  Treasury.     The  courts  cannot  make  or  change  law. 

Stegall  was  placed  in  jail  by  the  judge  of  the  state  court  and  fined  $300  for 
declining  to  testify  as  to  what  was  being  done  at  Cureton's  distillery,  as  stated 
above.  He  was  actually  in  jail  when  tlie  application  for  writ  of  habeas  corpus 
was  made  and  when  the  writ  was  issued.     »     *     * 

I  have  given  this  case  the  most  careful  examination  and  consideration,  be- 
cause its  importance  merits  it.  The  courts  of  the  United  States  will  not  lightly 
interfere  with  the  action  of  the  state  court,  and  a  case  must  be  presented  to 
make  action  imperative  before  such  action  will  be  taken. 

I  am  compelled  to  enter  an  order  that  the  petitioner  be  discharged. 


Appendixes.  217 


APPENDIX  0. 

(T.  D.  1617.) 

TREASURY    DEPARTMENT    REGULATION. 

Examination  of  Books,  Etc.,  Belonging  to  Corporations,  Etc. 

Treasury  Department, 

Office  of  Commissioner  of  Internal  Revenue, 

Washington,  D.  C,  April  19,  1910. 
To  Internal  Revenue  Agents. 

The  following  instructions  are  issued  for  the  guidance  of  internal  revenue 
agents  in  the  matter  of  examining  the  books  and  papers  belonging  to  corpo- 
rations, joint  stock  companies,  associations  and  insurance  companies  subject 
to  the  special  excise  tax  imposed  by  section  .38,  Act  of  August  5,   1909. 

On  receiving  from  the  collectors,  or  from  this  office,  a  list  of  corporations, 
etc.,  which  have  failed  to  file  the  required  returns,  or  which  have  filed  defec- 
tive or  unsatisfactory  returns,  agents  will  at  once  proceed  to  make  the 
investigation  provided  for  in  the  fourth  paragraph  of  said  section  38.  They 
will,  in  each  case,  after  calling  the  attention  of  the  proper  officer  of  the  cor- 
poration to  the  provisions  of  the  statute,  request  the  production  of  such 
"  books  and  papers  bearing  upon  the  matters  required  to  be  included  in  the 
return  of  such  corporation,"  as  may  be  found  necessary  to  make  the  examina- 
tion here  directed. 

In  most  cases  the  errors  in  the  returns  rendered  are  probably  due  to  mis- 
apprehension on  the  part  of  the  officers  of  the  corporation  as  to  requirements 
of  the  law  and  regulations  respecting  the  preparation  of  such  returns.  See 
T.  D.  1606  for  list  of  the  various  questions  which  have  arisen  under  the  law 
and  the  decisions  thereunder. 

In  conducting  their  examination  the  agents  will,  except  in  glaring  cases  of 
misrepresentation,  proceed  on  the  assumption  that  all  errors  in  the  roturn3 
rendered  are  unintentional;  and  they  will,  so  far  as  possible,  make  their 
examination  in  such  matter  as  not  to  interfere  with  the  company's  business, 
either  as  to  the  use  of  its  books,  or  in  the  general  conduct  of  its  officers.  Con- 
tentions with  officers,  employees  or  representatives  of  corporations  are  to  be 
carefulh'  avoided,  and  no  action  that  may  cause  friction,  that  is  not  necessarv 
in  the  proper  performance  of  their  duties,  must  be  indulged  in  by  officers 
making  these  examinations. 

Ordinarily  no  very  extended  examination  of  the  company's  books  will  he 
necessary  as  the  verification  of  the  particular  items  to  which  attention  hasj 
been  called  will  be  sufficient.  Where,  however,  an  extended  examination  is 
found  to  be  necessary,  and  the  accounts  are  so  kept  as  to  involve  mucli  labor 
in  tlirir  examination,  the  agent  may  assign  two  assistants  for  this  purpose. 

\\''here  discrepancies  between  the  company's  books  and  the  return  made  are 
discovered,  the  officers  of  the  company  should  be  given  full  opportunity  to 
explain  the  same,  and  to  furnish  if  'so  desired,  a  sworn  statement  in  reference 
thereto.  In  such  cases  the  agent  will,  if  deemed  necessary  require  the  assist- 
ance of  any  officer  or  employee  of  the  company,  and  there  examine  such  officer 


21S  Federal  Corporation  Tax  T>aw. 

or  employee  respecting  the  matter  under  investigation  as  provided  in  section 
38.  The  witnesses  in  such  cases  shouki  be  duly  sworn  by  the  agent,  as  espe- 
cially provided  in  said  section  38;  anil  in  case  of  refusal  of  any  such  officer 
or  employee  to  testify,  or  in  case  of  refusal  to  produce  books  or  papers  called 
for,  the  agent  will  at  once  report  the  fact  to  this  office. 

A  separate  report  of  the  investigation  of  each  case  should  be  made  and 
whore  an  additional  tax  is  found  to  be  due,  a  copy  of  such  report  should  ha 
furnished  the  collector  of  the  district. 

The  attention  of  agents  and  their  assistants  is  specially  called  to  paragraph 

7  of  said  clause  38,   making  it   unlawful   for  any  officer  or  employee  of  thft 

United  States  to  divulge  or  make  known  in  any  manner  not  ])rovidpd  by  law, 

any    information   obtained    from    any   document    received,    evidence    taken    or 

report  made  under  the  provisions  of  that  section. 

Royal  E.  Cabell, 

Commissioner. 
Approved  : 

Franklin  MacVeagh, 

Secretary  of  the  Treasury. 


Appendixes.  211) 


APPENDIX  P. 

(T.  D.   1633.) 

(Additional  Notice  (Form  17)  to  Be  Sent  to  Delinquent  Corporations.) 

Treasury  Department, 
Office  of  Commissioner  of  Internal  Revenue, 

Washington,  D.  C,  May  27,  1910. 
As  there  appears  to  be  some  misunderstanding  on  the  part  of  certain  col- 
lectors in  the  matter  of  sending  notices  on  Form  17,  to  corporations  failinf* 
to  pay  their  special  excise  tax  on  or  before  June  30,  the  attention  of  such 
collectors  is  specially  called  to  mimeograph  letter  No.  660  of  January  27,  1910. 
As  noted  in  that  letter,  notice  on  a  modified  Form  17  should  be  sent  to  each 
corporation  assessed,  on  receipt  of  tlie  assessment  list,  on  or  before  June  1, 
1910,  as  provided  in  paragraph  5,  section  38,  act  of  August  5,  1909;  also  a 
further  notice  on  the  regular  blank  Form  17,  in  case  the  assessed  tax  is  not 
paid  on  or  before  June  30,  1910. 

This  additional  notice  is  necessary  by  reason  of  the  fact  that  the  section 
further  provides : 

*  *  *  "  and  to  any  sum  or  sums  due  and  unpaid  after  the  thirtieth  day 
of  June  in  any  year,  and  for  ten  days  after  notice  and  demand  thereof  by  the 
collector,  there  shall  be  added  the  sum  of  five  per  centum  on  the  amount  of 
tax  unpaid  and  interest  at  the  rate  of  one  per  centum  per  month  upon  said 
tax  from  the  time  the  same  becomes  due     *     *     *  " 

Collectors  will  therefore,  in  all  cases,  cause  such  additional  notice  to  be 
sent  to  delinquent  corporations  immediately  upon  the  expiration  of  the  time 
fixed  for  the  payment  of  the  tax  due,  namely  June  30. 

Royal  E.  Cabell. 

Commissioner. 


220        Federal  Corporation  Tax  Law. 


APPENDIX  P^ 

(T.  D.   1634.) 

State,  County  and  Municipal  Corporations  Not  Liable  to  Tax  under  tiie 

FEDEitAx  Corporation  Tax  Law. 

Treasury  Department, 
Office  of  Commissioner  of  Internal  Revenue, 

Washington,  D.  C,  May  27,  1910. 

SIR:  — Yours  of  24th  instant  is  received,  inquiring  whether  municipal  cor- 
porations—  that  is,  corporations  absolutely  owned  by  municipalities,  and  in 
which   no  shares  are  sold  —  are   liable  to  tax  under  the  federal  corporation 

tax  law. 

In  reply  you  are  advised  that  in  the  opinion  of  this  office  it  is  clear  that 
such  corporations  are  not  suliject  to  this  tax. 

As  a  general  rule,  public  property,  whether  belonging  to  the  Federal  Gov- 
ernment, the  various  States,  or  the  political  subdivisions  of  such  States  or 
municipalities,  is  not  subject  to  taxation.  It  has  been  held  frequently  tliat 
the  exemption  in  favor  of  municipalities  extend  to  gas  works,  water  works, 
and  electric  light  i)lant8.  While  these  public  utilities  may  be  and  frequently 
are  conducted  by  niuiiicipalities  at  a  profit,  the  making  of  profit  is  not  tlie 
main  purpose,  but  rather  the  public  service.  They  are  not  corporations 
"  organized  for  profit."  ^Moreover  they  are  not  corporations  "  having  a  capital 
stock  represented  by  shares." 

In  order  to  render  a  corporation  taxable  under  the  act  of  August  5,  1900. 

it  is  necessary  that  it  be  such  a  corporation  as  is  primarily  organized   for 

profit   and   has   a  capital   stock   represented   by   shares.     Therefore,   a    State, 

county,   or  city  furnisliing   its  population   with   water,   gas,  or   electric   li^lit 

would  not,  although  charging  for  such  service  and  acquiring  a  profit  therefrom, 

be  taxable  under  tliis  act. 

Respectfully 

Royal  E.  Cabell, 

Comrnissioner. 

Mr.  H.  A.  Rtcker. 

C'olkctor  Internal  Revenue,  Atlanta,  Ga. 


APPENDIXJiS.  221 


APPENDIX  Q. 

(T.  D.   1639.) 

(All   Regular  Lists   and   All  Corporation   Tax   Lists   Requirbh)  to  Be 
Taken  Up  Separately  Hereafter  on  Forms  5 IB,  79,  and  325.) 

Treasury  Departme:nt, 

Office  of  Commissioner  of  Internal  Revenue, 

Washington,  D.  C,  June  L3,  1910. 
To  Collectors  of  Internal  Revenue. 

Hereafter  on  Form  51B  collectors  will  report  separately  all  regular  lists 
and  all  corporation  tax  lists  on  which  there  are. outstanding  taxes  at  the  bo- 
ginning  of  the  month.  The  collections  on  the  corporation  tax  lists  reported 
thereon  must  agree  in  the  aggregate  with  the  amount  of  corporation  taxes 
reported  collected  on  Form  22  and  with  the  total  of  amounts  indorsed  on  the 
certificates  of  deposit  for  the  month. 

In  taking  up  a  list,  either  corporation  tax  or  regular,  for  the  first  time,  the 
full  amount  thereof  should  be  entered  in  the  margin  of  the  Form  51 B  for  the 
month  in  which  the  Form  23  V>  is  receipted,  the  amount  of  advance  collections 
thereon  previously  reported  should  be  placed  underneath,  and  the  net  amount 
carried  into  the  column  headed  "  Taxes  unaccounted  for  in  previous  report, 
new  list,  etc."  (See  first  three  paragraphs  on  page  22  of  Regulations  No.  2, 
revised  July  1,  1908,  and  Note  A  on  Form  51B.)  Lentil  a  list  has  been  made 
up  in  this  office,  returned  to  a  collector  and  receipted  for  by  him  on  Form 
23%,  he  should  report  on  Form  51B  the  advance  collections  only. 

If  a  collector  should  not  receive  from  this  ofBce  his  list  for  the  first  or 
second  month,  of  a  quarter  before  the  end  of  that  quarter,  he  should  immedi- 
ately, on  the  first  day  of  the  succeeding  quarter,  sign  and  forward  to  this 
office  a  report  on  Form  476  for  the  amounts  collected  in  advance  on  that  list. 
as  under  such  circumstances  he  is  properly  chargeable  on  his  quarterly 
account  with  the  advance  collections  only.  ( See  instructions  relative  to 
receipt  on  Form  476  for  February,  1910,  corporation  tax  list  in  Mini.  672, 
dated  March  19,  1910. 

Hereafter  on  Form  79  there  should  be  interlined  on  line  3  immediately  after 
the  words  "  On  Form  492  "  the  amount  of  corporation  taxes  deposited  during 
the  quarter  and  the  amount  of  other  internal  revenue  collections  deposited,  and 
the  total  of  these  two  items  carried  into  the  money  column.  The  amount  of 
corporation  taxes  deposited  must  agree  with  the  total  of  the  amounts  reported 
on  Forms  22  for  the  three  months  of  that  quarter. 

On  line  24  of  Form  79  there  should  be  entered  separately  each  Form  23% 
receipted  during  the  quarter  and  each  Form  476  receipted  for  advance  collec- 
tions made  during  that  quarter. 

Instructions  herein  given  relative  to  51B  should  be  followed  in  the  prepara- 
tion of  reports  on  Form  325. 

Royal  E.  Cabell, 

Commissioner. 


222  ±'edejjal  Corpokation  Tax  Law. 


APPENDIX  R. 

(T.  D.   1651.) 

FrvE  Per  Cent  Penalties. 

Tbeasuby  Department, 
Office  of  Commissioner  of  Internal  Revenue, 

Washington,  D.  C,  August  27,  1910. 

SiB: — Your  letter  of  the   19th  instant   relative  to  the  collection  of  5   per 

cent  penalty  from  the  F Bank  of  D ,  the  1' Cotton  ]Mills, 

and  the  D Cotton  Manufacturing  Company,  all  of  ,  North 

Carolina,  has  been  received. 

This  matter  has  been  given  further  and  careful  consideration  and  with  the 
facts  now  presented  to  this  office,  in  connection  witii  an  examination  of  the 
records  and  accounts  on  file,  it  appears  that  the  taxes  assessed  against  these 
corporations  were  not  paid  within  ten  days  after  mailing  the  prescribed  notice 
within  the  meaning  of  the  law. 

The  checks  tendered  you  in  payment  of  the  taxes  due  were  drawn  by  the 
corporations  named  above  on  the  ¥ Bank  of  D ,  one  of  the  tax- 
payers involved.     While  it  may  be  true,  as  asserted  by  the  taxpayers  and  as 

stamped  by  the  F Bank,  tluit  these  checks  were  paid  to  the  collecting 

bank  at  Releigh,  July  2,  1910,  there  is  no  evidence  tliat  the  proceeds  wore 
placed  in  your  hands  or  to  the  account  of  the  Governinent  until  July  13tli. 
This  is  shown  by  your  Form  325  for  July,  1910,  the  stubs  of  receipts  Form  1, 
numi)ered  876658,  87600,  and  870663,  and  your  certificate  of  deposit  for  July 
13,  1910,  No.  3093. 

If  tlie  Citizen's  National  Bank  of  Raleigh  received  the  amount  of  tlie  taxes 
due,  but  failed  to  turn  tlie  same  over  to  you  to  be  placed  to  tlie  credit  of  the 
Treasurer  of  the  United  States  in  time  to  avoid  the  liability  to  5  per  cent 
penalty  as  imposed  by  section  3184,  Revised  Statutes,  holding  the  same  eleven 
days,  this  unusuiil  neglect  on  the  bank's  part  is  no  valid  reason  why  the 
penalty  sliduld  not  l)e  (li'iuitiided. 

The  Citizen's  National  ]5ank  is  not  an  agency  for  the  collection  of  internal 
revenue  taxes.  This  ofTice,  therefore,  upon  thorough  consideration  of  tlie 
matter,  can  not  hold  with  fairness  that,  liecause  this  bank  is  a  (iovernment 
depository,  any  laches  on  its  ji.-ut  in  (  1h'  performance  of  Imsiiiess  duties  out- 
side of  its  fiinctiims  as  such  shall  alTert  the  interests  of  the  Ciovernment.  and 
therefore  the  rule  laid  down  for  your  guiibinpe  in  tins  matter  in  letter  to  you 
(lilted   tlif    lltli    instant    is   hereby  revoked. 

The  5  yper  nnt  [icnrilt  i<'s  ^lioulil  lie  (•(ill<'rt<'(i  in  tliesc  nrid  the  other  cases  to 
which  you  refi-r  in  your  letter  of  tiir  lIHIi  insiunt,  and  to  which  the  same 
yirincijilr  will  apply. 

Respectfully, 

J.  C.  Wheeler, 

Acting  Commiasioner. 
Mr.  Wmf.ei.f.r  Marttn. 

Collector  Fourth  IH.itrict,  Raleigh,  N.  C. 


Appejvdixes.  223 


APPENDIX  S. 

(T.  D.   lt)54.) 
Heal  Estate  Sold  under  Warrant  of  Distr.vint. 

Treasury  Department, 
Office  of  Commissioner  of  Internal  Revenue, 

Washington,  D.  C,  September  16,  1910. 
8iB: — Upon  examination  of  your  report  on  Form  325  for  August  it  ap- 
pears from  proper  memoranda  following  balances  outstanding  against  your 
September,  1909,  list,  that  distraint  sales  were  made  on  IMay  19,  1910,  and 
July  15,  1910.  In  each  of  these  cases  there  being  no  personal  property  be- 
longing to  the  delinquents,  real  estate  owned  and  occupied  by  said  delinquents 
was  seized  under  warrant  of  distraint,  advertised  and  offered  for  sale  to  tlie 
highest  bidder.  There  being  no  bidders,  the  deputy  collector,  acting  for  the 
collector,  in  conducting  the  sale,  bid  the  said  real  estate  in  for  the  use  of 
the  United  States,  naming  as  the  amount  bid  the  amount  of  assessed  taxes, 
accrued  penalty  and  interest  on  the  same  and  the  cost  of  the  sale.  By  this 
action  the  delinquents'  debt  to  the  United  States  was  extinguished  (see  United 
States  V.  Triplitt,  22  Int.  Rev.  Rec.  207),  and  credit  on  the  list  and  Form 
325  should  be  taken. 

In  purchasing  for  the  United  States  property  offered  for  sale  under  dis- 
traint proceedings  the  offer  making  the  sale  is  not  required  and  should  not 
bid  the  full  amount  due  the  United  States  unless  the  appraised  or  estimated 
cash  value  of  the  property  exclusive  of  all  prior  liens,  approximate  at  least 
double  that  amount. 

As  stated  on  page  36  of  Regulations  No.   12  revised  — 

Real  estate  seized  under  distraint  and  offered  for  sale  should  be  offered  at 
a  minimum  price,  ordinarily  one-half  the  cash  value  of  the  land,  but  in  no  case 
more  than  the  tax,  interest,  and  penalty,  and  all  expenses  of  levy  and  sale, 
including  all  charges  for  advertising.  If  no  person  offers  for  said  estate  the 
amount  of  the  minimum  price  the  officer  making  the  sale  should  bid  the  prop- 
erty in  for  the  United  States  for  no  larger  sum  than  is  necessary  to  effectuate 
the  object  which  is  to  prevent  the  sale  for  an  inadequate  price. 

Respectfully, 

J.  C.  Wheeler, 

Acting  Commissioner. 


224  !Fjedekal  Corpoeation  Tax  Law. 


APPENDIX  T. 

(T.  D.   1655.) 
When  So-called  Mutual  Building  and  Loan  Associations  Should  Make 

THE  REQUIBED  RETUBN   AND  WiLL  Be  HELD  SUBJECT  TO  THE  TaX   IMPOSED 

BY  Section  38  of  the  Act  of  August  5,  1909.     ^ee  Item  30,  T.  D.  1606. 

Tbeasuby  Department, 
Office  of  Commissioner  of  Internal  Revenue, 

Washington,  D.  C,  September  24,  1910. 

SiB:  — Your  letter  of  the  20th  instant  relative  to  the  special  excise  tax  on 
corporations,  has  been  received,  in  which  you  give  a  list  of  building  associa- 
tions in  your  district  which  have  made  affidavit  that  they  are  purely  mutual 
associations ;  that  they  have  not  loaned,  nor  do  they  loan,  to  otliers  than  their 
members;  and  that  their  shareholders,  both  borrowers  and  non  borrowers,  have 
credited  to  their  several  accounts  their  pro  rata  of  all  dividends  declared  by 
the  associations,  and  that  they  are  therefore  exempt  from  the  provisions  of  the 
act  of  August  oth,  1909,  providing  for  the  special  excise  tax  on  corporations, 
and  in  which  letter  you  request  permission  to  strike  those  corporations  from 
the  schedule  in  your  office. 

In  reply,  you  are  informed  that  it  woukl  appear  that  further  information 
is  necessary  in  some,  if  not  all,  of  these  cases. 

It  has  been  held  that  buikling  and  loan  associations  are  not  exempt,  if  they 
loan  money  to  others  than  their  members,  thus  doing  a  business  similar  to 
that  engaged  in  by  banks  or  trust  companies.  It  is  also  held  that  building 
and  loan  associations  which  receive  sums  of  money  on  deposit  which  is  not  in 
payment  of  stock,  and  on  which  the  depositor  receives  a  fixed  rate  of  interest 
regardless  of  the  earnings  of  the  association,  are  conducting  a  business 
similar  to  a  banking  business,  and  ar(>  tlwrcforo  subject  to  the  s])ooial  <>xcise 
tax  on  corporations  and  should  be  required  to  make  a  return  showing  their 
net  income. 

In  your  list  is  given  lln'  name  of  the  ,  which  is  known  to  receive 

deposits  from  8harelK>l(lcrs  and  others  on  whicli  a  fixed  rate  of  interest  for  the 
use  of  the  money  so  deposited  is  paid.  The  money  so  received  is  loaned  again 
at  a  rate  of  interest  higher  than  that  paid  to  depositors,  from  which  it 
appears  that  a  business  for  profit  is  being  conducted.  The  practice  of  receiving 
♦ioposits  and  paying  a  fixed  rate  of  interest  thereon  also  destroys  the  purelj* 
mutual  nature  of  the  association. 

It  is  quite  probable  that  there  are  others   in  the  list  conducting  business 

along  similar  lines,  and  further  inquiry  should  be  made  to  ascertain  the  facta 

in  caeh  rase,  and  a  return  should  be  required  where  your  inquiry  shall  discloee 

the  necessity  therefor. 

Respertfully, 

J.  C.  Wheeleb, 

Actinp  Commixaioner. 
Mr.  r.  L.  r.ornsnoROUOii, 

Collector  Internal  Reveruc,  lialtimorr,  Md. 


Appejjdixes.  225 


APPENDIX  TJ. 

(T.  D.   1656.) 

insteuctions  relative  to  preparation  of  account  on  fobm  79. 

Treasury  Department, 
Office  of  Commissioner  of  Internal  Revenue, 

Washington,  D.  C,  October  6,  1910. 
To  collectors  of  internal  revenue. 

There  has  been  sent  to  each  collector  a  supply  of  Forms  79,  revised  July  28, 
1910,  in  accordance  with  1907  Department  Circular  No.  52.  All  old  blank 
Forms  79  should  be  destroyed  as  required  by  Regulations  No.  2,  revised,  page 
19,  last  paragraph,  under  "  General  Instruction  Relative  to  Reports." 

Beginning  with  the  quarter  ended  September  30,  1910,  the  quarterly  revenue 
accounts  will  be  made  out  on  the  new  form,  even  if  accounts  have  been  ren- 
dered on  the  old  prior  to  the  receipt  of  this  letter. 

On  the  new  form  separate  columns  are  provided  for  the  regular  and  the 
corporation  tax  lists,  thus  requiring  an  accounting  for  regular  taxes,  etc.,  and 
a  distinct  accounting  for  regular  taxes,  etc.,  and  a  distinct  accounting  for 
corporation  taxes,  etc. 

On  line  4  there  will  be  entered  in  column  1  the  amount  of  deposits  on 
account  of  regular  taxes  collected,  in  column  2  the  amount  on  account  of  cor- 
poration taxes  collected,  in  column  3  the  amount  on  account  of  special  tax 
stamps  sold,  etc.,  and  in  the  last  column  the  total  amount  of  deposits  for  thft 
period  for  which  the  account  is  rendered. 

On  line  5  there  will  be  entered  in  column  1  the  amount  of  abatements  on 
regular  lists,  and  in  column  2  the  amount  on  corporation  tax  lists,  and  the 
total  of  the  abatements  for  the  period  in  the  last  column. 

The  method  of  making  entries  on  the  other  lines  will  be  similar  to  that  for 
lines  4  and  5 

Care  must  be  taken  to  have  each  column  in  balance. 

In  the  accounts  of  the  various  stamps  no  fractions  should  be  used  and  amounts 
entered  should  state  the  actual  value  of  stamps  sold,  returned,  on  hand,  etc., 
to  the  nearest  cent.  All  excesses  arising  in  the  sale  of  stamps  on  account  of 
fractions  should  be  carried  to  Form  58  of  the  regular  list  each  month  as 
directed  in  paragraph  5  of  instructions  on  Form  79. 

The  amounts  entered  on  line  11  should  be  verified  by  actual  count. 

The  certificate  at  the  bottom  of  the  form  and  the  first  indorsement  should 
be  properly  signed. 

Record  No.  32  will  be  revised  to  conform  to  new  Form  79,  and  as  soon  aa 

printed  will  be  sent  to  each  collector. 

Royal  E.  Cabexl, 

Commissioner. 


Fed.  Corp.  Tax  —  15 


226  Fp:dkkai.  Cokporatioh-  Tax  Law. 


APPENDIX  V. 

(T.  D.   1659.) 

Five  Feb  Cent  Penaltt  and  Interest  on  Delayed  Payments  of  Assessed 

Taxes. 

Treasury  Department, 
Office  of  Commissioner  of  Internal  Revenue, 

Washington,  D.  C,  October  20,  1910. 
To  collectors  of  internal  revenue. 

In  view  of  the  provisions  of  the  State  (section  3184,  and  paragraph  5,  sec- 
tion 38,  act  of  August  5,  1909)  for  the  collection  of  a  5  per  cent  penalty  and 
interest,  as  to  all  assessed  taxes  not  paid  within  ten  days  after  notice  and 
demand,  collectors  will,  where  such  notice  and  demand  (Form  17)  ia  to  be 
forwarded  by  mail,  enter  therein,  as  the  date  on  which  such  assessed  tax  be- 
comes due  and  payable,  a  date  ten  days  subsequent  to  that  of  actual  mailing, 
and  not  as  reckoned  from  the  date  of  the  notice  as  now  required  in  the  footnote 
on  said  Form. 

Where  a  notice  so  sent  is  not  delivered  in  due  time,  by  reason  of  delay  in 
the  mail,  and  satisfactory  evidence  of  that  fact  is  furnished,  the  penalty  and 
interest  in  such  cases  will  not  be  collected,  provided  the  full  tax  is  paid  to 
the  collector  within  ten  days  of  the  actual  receipt  of  the  notice.  In  such  cases 
the  envelope  enclosing  the  notice  and  bearing  the  postmark  of  the  receiving 
office  should  be  forwarded  to  the  collector  and  by  him  transmitted  to  this 
office,,  with  his  Form  325,  as  evidence  of  delay  in  the  delivery  of  the  notice  80 

sent. 

So  much  of  the  instruction  contained  in  the  first  paragraph  on  page  111 
of  Regulations  No.  1  as  is  inconsistent  herewith  is  hereby  revoked. 

RoYAi.  E.  Cabetx, 

Commissioner, 

Approved : 

Charles  D.  TTillis, 

Assistant  Secretary  of  the  Treasury. 


AppE.vDixEii.  227 


APPENDIX  W. 

(T.  D.   1664.) 

Blank  Fobms  fob  Returns  to  Be  Furnished  by  Collecttobs  Onlt  to 
Corporations  Making  Returns. 

Tbeasuby  Department, 
Office  of  Commissioner  of  Internal  Revenue, 

Washington,  D.  C,  November  17,  1910. 
SiB:  — Your  letter  of  the  15th  instant  has  been  received,  in  which  you  call 
attention  to  the  constant  demand  from  lawyers,  accountants,  etc.,  for  any- 
where from  25  to  150  blank  forms  for  the  returns  of  corporations  for  the 
special  excise  tax  on  corporations,  and  inquire  if  the  same  shall  be  furnished 
such  applicants. 

In  reply,  you  are  informed  that  the  supply  of  new  forms  furnished  you  was 
intended  to  supply  only  the  corporations  making  return  for  the  special  excise 
tax  on  corporations  in  your  district,  and  all  persons  not  connected  with  or 
actually  representing  such  corporations  should  be  instructed  to  make  their 
requests  for  these  blank  forms  direct  to  this  office,  where  proper  action  on 
each  such  request  will  be  taken. 

Respectfully, 

RoYAi,  E.  Cabell, 

Commiaaioner. 
Mr.  Charles  W.  Anderson, 

Collector,  Second  District,  New  York. 


228        Federal  Corpokation  Tax  Law. 


APPENDIX  X. 

(T.  D.   1665.) 
Inspection  of  Retubns  of  Corporations  —  Executive  Obdeb,  Etc. 

Treasury  Department, 
Office  of  Commissioner  of  Internal  Re\t:nue, 

Washington,  D.  C,  November  28,  1910. 

To  internal  revenue  officers  and  others  concerned. 

The  following  executive  order,  together  with  regulations  signed  by  the  Sec- 
retary and  approved  by  the  President,  relative  to  the  publicity  feature  of 
section  38  of  the  act  of  August  5,  1909,  and  amendments  thereto,  imposing  a 
special  excise  tax  on  corporations,  etc,  is  hereby  published  for  your  infor- 
mation. 

Royal  E.  Cabell. 

Commissioner. 
Executive  Order. 

Pursuant  to  the  provisions  of  an  act  entitled  "An  Act  making  appropria- 
tions for  the  legislative,  executive  and  judicial  expenses  of  the  Government 
for  the  fiscal  year  ending  June  thirtieth,  nineteen  hundred  and  eleven,  and  for 
other  purposes,"  providing  among  other  things  an  appropriation  for  classify- 
ing, indexing,  exhibiting  and  properly  caring  for  the  returns  of  all  corpora- 
tions required  by  section  thirty  eight  of  an  act  entitled.  "An  Act  to  provide 
revenue,  equalize  duties,  encourage  the  industries  of  the  United  States  and 
for  other  purposes,"  approved  August  5,  1909,  and  further  enacting  that  any 
and  all  such  returns  shall  be  open  to  inspection  only  upon  the  order  of  the 
President  under  rules  and  regulations  to  be  prescribed  by  the  Secretary  of  the 
Treasury,  and  approved  by  the  Prcvsident  (30  1  Stat.  494). 

It  is  hereby  ordered,  that  all  such  returns  shall  be  subject  to  inspection 
upon  compliance  with  rules  and  regulations  prescribed  by  the  Secretary  of  the 
Treasury,  and  approved  by  the  President,  bearing  even  date  herewith. 

Wm.  H.  Taft. 
The  White  House, 

November  25,  1910. 

Reoulations  Governing  the  Inspection  of  Returns  of  Corporations  Made 
IN  Accordance  with  Section  38  of  the  Tatiff  Act  of  August  5,  1909. 

Treasury  Department, 
Wnshinfitnn,  D.  C,  November  25,  1910. 
In.ipccdon   of   h'rtiirns. 

By  section  38  of  the  tnrifT  act  of  August  .'),  1009.  Congress  imposed  a  special 
excise  tax  upon  all  corporations,  joint  stock  companies,  and  associations,  and 
insnrnnoe  rnnipanies.  fnrei<?n  and  donieHlic.  with  certain  exceptions,  engaged 
in  littHinf-Ps  in  the  T'nitf'  Stnf<'«,  witli  r<"ip('cf  in  crirrying  on  or  doing  siirli 
bnsinfv'".  and  prcHrrilH-d  tlie  mctliod  of  lian<llirig  (he  return  of  each  corporation 
aH  follows: 


Appkxdixes.  229 

6.  When  the  assessment  shall  be  made,  as  provided  in  this  section,  the  re- 
turns, togetlier  with  any  correction  thereof  whicli  may  have  been  made  by  the 
Commissioner,  shall  be  filed  in  the  office  of  the  Commissioner  of  Internal  Rev- 
enue and  shall  constitute  public  records  and  be  open  to  inspection  as  such. 

In  the  act  making  appropriations  for  the  legislative,  executive  and  judicial 
departments  of  the  Government  for  the  fiscal  year  ending  June  30,  1911,  there 
appears   this  language: 

"  For  classifying,  indexing,  exhibiting  and  properly  caring  for  the  returns 
of  all  corporations,  required  by  sec^^ion  thirty-eight  of  an  act  entitled  "An  Act 
to  provide  revenue,  equalize  duties,  encourage  the  industries  of  the  United 
States  and  for  other  purposes,"  approved  August  fifth,  nineteen  hundred  and 
nine,  including  the  employment,  in  the  District  of  Columbia,  of  such  clerical 
and  other  personal  services  and  for  rent  of  such  quarters  as  may  be  necessary, 
twenty-five  thousand  dollars;  Provided,  That  any  and  all  such  returns  shall 
be  open  to  inspection  only  upon  the  order  of  the  President,  under  rules  and 
regulations  to  be  prescribed  by  the  Secretary  of  the  Treasury  and  approved  by 
the  President. 

For  the  purpose  of  making  effective  the  legislative  intent  thus  expressed, 
the  President  has  ordered  that  all  such  returns  shall  be  open  to  inspection 
under  the  following  rules  and  regulations: 

1.  The  return  of  every  corporation  shall  be  open  to  the  inspection  of  the 
proper  officers  and  employees  of  the  Treasury  Department.  Where  access  to 
any  return  is  desired  by  an  officer  or  employee  of  any  other  department  of  the 
Government,  an  application  for  permission  to  inspect  such  return,  setting  out 
the  reasons  therefor,  shall  be  made  in  writing,  signed  by  the  head  of  the  execu- 
tive department  or  other  Government  establishment  in  which  such  officer  or 
employee  is  employed,  and  transmitted  to  the  Secretary  of  the  Treasury.  If, 
however,  the  return  is  desired  to  be  used  in  any  legal  proceedings,  or  to  be 
used  in  any  manner  by  which  any  information  contained  in  the  return  could 
be  made  public,  or  access  to  any  return  is  desired  by  any  official  of  any  State 
or  Territory  of  the  United  States,  the  application  for  permission  to  inspect 
such  return  shall  be  referred  to  the  Attorney-General  and  if  recommended  bv 
him  transmitted  to  the  Secretary  of  the  Treasury. 

2.  The  Secretary  of  the  Treasury,  at  his  discretion,  upon  application  to  him 
made,  setting  forth  what  constitutes  a  proper  showing  of  cause,  may  permit 
inspection  of  the  return  of  any  corporation  by  any  bona  fide  stockholder  in 
Buch  corporation.  The  person  desiring  to  inspect  such  return  shall  make 
application  in  writing,  to  the  Secretary  of  the  Treasury,  setting  forth  the 
reasons  why  he  should  be  permitted  to  make  such  inspection,  and  shall  attach 
to  his  application  a  certificate  signed  by  the  president,  or  other  principal 
officer,  of  such  corporation,  countersigned  by  the  secretary,  under  the  corpo- 
rate seal  of  the  company,  that  he  is  a  bona  fide  stockholder  in  said  company. 
(Where  this  certificate  can  not  be  secured,  other  evidence  will  be  considered 
by  the  Secretary  of  the  Treasury  to  determine  the  fact  wliether  or  not  the 
appliant  is  a  bona  fide  stockholder  and  therefore  entitled  to  inspect  the  return 
made  by  such  company.)  The  privilege  of  inspecting  the  return  of  any  cor 
poration  is  personal  to  the  stockholders,  and  the  permission  granted  by  the 
Secretary  to  a  stockholder  to  make  such  inspection  can  not  be  delegated  to  any 
other  person. 


23u 


Fedeeal  Cokpokation  Tax  Law.  | 


3.  The  returns  of  the  following  corporations  shall  be  open  to  the  inspection 
of  any  person  upon  written  application  to  the  Secretary  of  the  Treasury, 
which  application  shall  set  forth  briefly  and  succinctly  all  facta  necessary  to 
enable  the  Secretary  to  act  upon  the  request  : 

(a)  The  returns  of  all  companies  wliose  stock  is  listed  upon  any  duly  or- 
ganized and  recognized  stock  exchange  within  the  United  States,  for  the 
purpose  of  having  its  shares  dealt  in  by  the  public  generally. 

(b)  All  corporations  whose  stock  is  advertised  in  the  press  or  offered  to 
the  public  by  the  corporation  itself  for  sale.  In  case  of  doubts  as  to  whether 
any  company  falls  within  the  classification  above,  the  person  desiring  to  see> 
such  return  should  make  application,  supported  by  advertisements,  prospectus, 
or  such  other  evidence  as  ho  may  deem  proper  to  establish  the  fact  that  the 
stock  of  such  corporation  is  offered  for  general  public  sale. 

Returns  can  be  seen  only  in  the  office  of  the  Commissioner  of  Internal  Rev- 
enue, in  Washington,  D.  C.  In  no  case  shall  any  collector,  or  any  other 
internal  revenue  officer  outside  of  the  Treasury  Department  in  Washington, 
permit  to  be  seen  any  return  or  furnish  any  information  whatsoever  relative 
to  any  return  or  any  information  secured  by  him  in  his  official  capacity 
relating  to  such  return. 

No  provision  is  made  in  the  law  for  furnishing  a  copy  of.  any  return  to  any 
person,  and  no  copy  of  any  return  will  be  furnished  except  to  the  corporation 
making  the  return^  or  its  duly  constituted  attorney. 

The  provisions  herein  contained  shall  be  effective  on  and  after  the  25th  day 
of  November,  1910. 

Franklin  MacVeagh, 

Secretary  of  the  Treasury. 
Approved : 

Wm.  H,  Taft, 

The  White  Howe,  November  25,  1910. 


Appendixes.  231 


APPENDIX  Y. 

(T.  D.  1675.) 

Special  Excise  Tax. 

(Synopsis  of  decisions   relating  to  special   excise  tax  on  corporations,   etc., 

imposed  by  section  38,  act  of  August  5,  1909.  —  T.  D.  1606  of  March  29, 

1910,  revised.) 

Tbeasuby  Department, 

Office  of  Commissioneb  of  Internal  Revb^^ub, 

Washington,  D.  C,  February  14,  1911. 

The  following  synopsis  of  decisions  made,  from  time  to  time,  on  questions 
relating  to  the  special  excise  tax  imposed  by  section  38,  act  of  August  5,  190!t, 
on  corporations,  joint  stock  companies,  associations,  and  insurance  companies, 
is  published  for  the  information  of  internal  revenue  officers  and  others  con- 
cerned. 

Royal  E.  Cabell, 

Commissioner. 


CLASS  of  corporations,  ETC.,  SUBJECTT  TO  TAX. 

1.  The  tax  imposed  by  the  act  applies  to  all  corporations,  etc.,  described, 
except  those  specifically  exempted,  without  reference  to  the  kind  of  business 
carried  on. 

2.  Every  corporation,  etc.,  not  specifically  enumerated  as  exempt  shall  make 
the  return  required  by  law,  although  its  net  income  during  the  year  may  not 
have  exceeded  $5,000. 

3.  Corporations  claiming  special  exemption  should  nevertheless  make  return 
(in  blank,  if  desired)  accompanied  by  a  statement  setting  forth  the  ground  0!i 
which  exemption  is  claimed. 

4.  Charitable  institutions  supported  by  voluntary  contributions  or  State 
appropriations  are  held  to  be  exempt  from  the  payment  of  the  special  excise 
tax  on  corporations,  but  should  file  a  return  in  blank  as  provided  in  para- 
graph 3  hereof. 

5.  Corporations,  etc.,  organized  during  the  year  or  going  into  liquidation 
during  the  year  should  nevertheless  render  a  sworn  return  on  the  prescribed 
form.  The  tax  imposed,  however,  is  held  not  to  apply  to  corporations  whica 
went  out  of  existence  prior  to  the  passage  of  the  act. 

6.  Where  company  has  dissolved  and  the  required  return  is  not  made  by  its 
oflicers,  such  return  will  be  prepared  by  commissioner. 

7.  Where  corporation  has  gone  into  bankruptcy,  returns  in  such  cases  to  be 
made  by  trustee  in  bankruptcy. 

8.  Railroad  companies  operating  leased  or  purchased  lines  to  include  all 
receipts  derived  therefrom,  and  if  bonded  indebtedness  has  been  assumed  may 
deduct  interest  thereon  to  an  amount  not  exceeding  its  own  paid-up  capital 
pfnrk.  If  such  subsidiary  companies  receive  income  in  the  way  of  rentals,  etc., 
return  to  be  also  made  by  such  companies. 

9.  Corporations,  etc..  organized  under  the  authority  of  the  Ignited  States  or 
any  State  or  Territory  thereof,  or  Alaska  or  the  District  of  Columbia,  to  in- 


232        Federal  Corporation  Tax  Law. 

elude  in  their  returns  not  only  the  income  derived  from  the  business  carried 
on  within  the  confines  of  the  United  States,  but  income  received  from  busi- 
ness transacted  in  any  foreign  country  as  well. 

10.  Corporations  having  branch  or  subsidiary  companies  to  include  in  their 
returns  the  income  of  all  such  companies  when  no  distinction  is  made  in 
operating  and  accounting  by  reason  of  the  separate  incorporation  of  such 
subsidiary  companies;  otherwise,  a  return  by  each  corporation  should  be 
made. 

11.  Foreign  companies  having  several  branch  offices  in  the  United  States 
should  each  designate  one  of  such  branches  as  its  principal  office  and  should 
also  designate  the  proper  officers  to  make  the  required  return. 

12.  Where  a  consolidation  of   two  or  more  corporations  has   been   effected 
during  the  year,  and  each  or  any  such  corporation  subsequent  to  such  consoli 
dation  collects  prior  existing  debts,  each  such  corporation  should  make  separ 
ate  return   and   include  therein  all   such   collected   debts,   as   also   all   income 
received  during  the  year  prior  to  the  date  of  consolidation. 

13.  "  Principal  place  of  business  "  is  held  to  mean  the  principal  office  where 
the  company  keeps  its  books  from  which  the  required  return  is  to  be  pre- 
pared and  not  the  place  where  the  operating  plant  is  located. 

14.  As  the  law  specifically  provides  that  the  tax  imposed  shall  be  computed 
on  the  net  income  during  each  calendar  year,  returns  of  income  based  on  any 
period  other  than  the  calendar  year  cannot  be  accepted. 

15.  Full  amount  of  stock,  as  represented  by  the  par  value  of  the  shares 
issued,  to  be  regarded  as  the  paid-up  capital  stock,  except  when  such  stock 
is  assessable  on  account  of  deferred  payments,  in  which  case  the  amouat 
actually  paid  on  such  shares  will  constitute  the  actual  paid-up  capital  stock 
of  the  corporation. 

16.  Capital  stock  held  to  include  both  preferred  and  common  stock, 

17.  Surplus  and  undivided  profits  not  to  be  included  in  capital  stock. 

18.  Holding  companies  known  as  "voting  trusts,"  receiving  only  dividends 
on  stock  lield,  and  having  no  capital  stock,  etc.,  not  liable. 

19.  Mutual  savings  banks  having  no  capital  stock  not  liable  to  tax  imposed. 
(Opin.  Atty.-Gen.  Feb.  14,  1910.) 

20.  Co  operative  dairies  not  issuing  stock  and  allowing  patrons  dividends 
based  on  butter  fat  in  milk  furnisliod  not  liable. 

21.  Foreign  steamship  companies  having  no  office  in  the  United  States, 
whose  vessels  only  occasionally  touch  at  ports  in  the  United  States,  not 
regard«'d  as  dniiig  business  in  fliis  country  witliin  the  meaning  of  the  statute. 

22.  Companies  organized  in  Porto  Rico  and  not  engaged  in  business  in  th.» 
United  States  not  subject  to  tax. 

2.3.  Corporations  owning  sugar  or  other  plantations  and  disposing  of  the 
products  thereof  not  entitled  to  exemption  as  agricultural  organizations. 

24.  Corporations  organized  to  sell  provisions,  etc.,  to  stockholders  and 
others  not  exempted. 

25.  Corporations  organized  for  the  purpose  of  holding  real  estate  to  make 
return  of  income  derived  from   the  projierty  so  held. 

20.  National  hanks  do  not  come  within  any  of  the  exemptions  named  in  the 

act. 

27.  "Aprieullur.il  or^'niii/n t ions  "  Iiehl  not  to  come  within  the  stntutory 
exemption.  unU-»s  their  chief  object  is  the  promotion  or  advancement  of  agri- 


Appendixes.  233 

cultural  interest,  and  no  part  of  the  net  income  inures  to  the  benefit  of  their 
stockholders. 

28.  Mutual  Hail  Association  regarded  as  an  insurance  company  and  not  as 
an  agrocultural  association,  and  therefore  liable  to  tax. 

29.  Exemption  in  favor  of  fraternal  beneficiary  associations  does  not  apply 
to  mutual  fire  insurance  companies. 

30.  Limited  partnership,  if  organized  for  profit  and  having  a  capital  stock 
represented  by  shares,  although  no  "  certificates  of  stock "  are  issued,  are 
liable  to  the  tax  imposed.      (Opin.  Atty.  Gen.  Feb.  14,  1910.) 

31.  Interest  received  on  government  bonds  to  be  included  in  gross  income. 
(Opin.  Atty.-Gen.  Jan.  13,  1910.) 

32.  Returns  should  be  signed  and  verified  by  two  of  the  officers  designated 
in  the  law.  Signing  of  one  person  holding  two  such  offices  not  permitted. 
Agents  for  foreign  steamship  companies  may  sign  the  required  returns,  if  io 
authorized  by  their  companies. 

33.  Returns  not  required  to  have  corporate  seal  affixed. 

34.  Returns  filed  with  deputy  collector  regarded  as  having  been  filed  with 
collector. 

35.  No  form  of  protest  prescribed.  Any  form  of  protest  sufficient  if  filed 
before  payment  of  tax.     Right  of  protest  not  to  be  denied. 

Inventories.  Accounts,  etc. 

36.  Where  an  inventory  or  its  equivalent  was  not  taken  at  the  close  of  th<» 
year  1908,  a  supplemental  statement  showing  such  inventory  approximately 
must  be  submitted  with  the  return  on  the  regular  form.  Such  supplemental 
statement  shall  be  verified  under  oath  by  the  treasurer  or  principal  financial 
officer  submitting  the  same.      (T.  D.   1578.) 

37.  Profits  realized  on  sale  of  real  estate  during  the  year,  also  increase  in 
value  of  unsold  property,  if  taken  up  on  the  books  of  the  corporation,  to  be 
included  in  income. 

38.  Cost  of  manufactured  articles,  or  articles  in  process  of  manufacture, 
held  to  include  original  cost  of  materials  used,  plus  cost  of  labor,  etc. 

39.  Mortgaged  real  estate  should  be  inventoried  at  its  full  value  and  amount 
of  mortgage  reported  as  indebtedness. 

40    Receipts  from  sale  of  patent  rights  to  be  included  in  income. 

41.  No  particular  system  of  bookkeeping  or  accounting  will  be  required  by 
the  department.  However,  the  business  transacted  by  corporations,  etc.,  must 
be  so  recorded  that  each  and  every  item  therein  set  forth  may  be  readily 
verified  by  an  examination  of  the  books  and  accounts  where  such  examination 
is  deemed  necessary. 

Deductions,  Expenses,  etc. 

42.  It  is  immaterial  whether  the  deductions  are  evidenced  by  actual  dis- 
bursements in  cash  or  whether  evidenced  in  such  other  way  as  to  be  properly 
acknowledged  by  the  corporate  officers  and  so  entered  on  the  books  as  to 
constitute  a  liability  against  the  assets  of  the  corporation,  etc.,  making  the 
return. 

43.  Mortgage   indebtedness   on   real   estate,   if   assumed  by   the  corporation 
acquiring  such  real  estate,  to  be  included  in  the  indebtedness  of  the  corpora 
tion.     But   if  not  so   assumed   and   remains  only   as    a    lien   on   the   propertv. 
interest  paid  thereon  may  be  deducted  as  a  charge  "  made  as  a  condition  to 


234         Federal  Corporation  Tax  Law. 

the  continued  use  or  possession  of  the  property."     (Opin.  Atty.-Gen.  Feb.  21, 
1910.) 

44.  Cost  of  erecting  building,  if  included  in  lease  under  which  property  i» 
held  by  company,  is  a  proper  deduction,  to  be  prorated  according  to  time  fixed 
by  lease. 

45.  General  expenses,  vsuch  as  coal,  ship  stores,  etc.,  of  foreign  steamship 
companies,  to  be  prorated  as  provided  in  act  for  interest  deductions. 

4(i.  Amount  received  by  nursery  companies  from  sales  of  trees,  etc.,  less 
amount  expended  for  seedlings  and  young  trees,  to  be  included  in  gross  income. 
Amount  expended  for  labor,  salesmen,  etc.,  to  be  deducted  as  expenses. 

47.  Commissions  allowed  salesmen,  paid  in  stock,  may  be  deducted  as  ex- 
pense if  so  charged  on  books. 

48.  Sales  of  stock  and  bonds  are  regarded  as  sales  of  capital  assets  and 
should  be  so  accounted  for.  (Art.  2,  regs.  31.)  But  proceeds  derived  from 
sale  of  bonds  used  in  defraying  ordinary  and  necessary  expenses  are  a  proper 
deduction  in  determining  the  company's  net  income. 

49.  Stock  issued  in  payment  of  property  purchased  represents  capital  in- 
vestments, and  notes  issued  during  the  year  represent  indebtedness.  Corpor- 
ate funds  applied  to  the  payment  of  outstanding  notes  not  a  proper  deduction 
in  ascertaining  net  income. 

50.  Amounts  expended  in  additions  and  betterments  which  constitute  an 
increase  in  capital  investment  not  a  proper  deduction. 

51.  Dividends  received  by  corporations  on  stock  of  other  corporations  whose 
net  income  does  not  exceed  $5,000  is  nevertheless  a  proper  deduction  under  the 
law.      (Opin.  Atty.-Gen.  Jan.  24,  1910.) 

52.  Dividends  received  on  stock  of  foreign  corporations  not  subject  to  tax 
not  a  proper  deduction. 

53.  Dividends  paid  employees  in  lieu  of  wages  not  proper  deduction  as 
expenses. 

54.  Royalties  on  patent  rights  to  be  reported  as  income.  Allowance  for 
depreciation  of  patents  expiring  during  year,  however,  will  be  allowed. 

55.  Lands  bought  previous  to  January  1,  1909,  and  sold  during  the  year 
1010,  should  have  the  profits  arising  from  such  sale  prorated  in  accordance 
with  the  number  of  years  the  land  was  held  by  the  corporation  and  the  num- 
ber of  years  the  law  was  in  effect,  if  no  accounting  of  increased  value  of  land 
was  made  in  returns  for  previous  years. 

56.  Banks  paying  taxes  assessed  against  their  stockholders  because  of  their 
ownerliip  of  the  sliares  of  stock  issued  by  such  bank  cannot  deduct  the  amount 
of  tax  so  paid  in  making  their  return  for  the  special  excise  tax  on  corporations. 

57.  Amounts  paid  for  pensions  to  retired  employees,  or  to  their  families  or 
otiiers  dependent  npon  them,  or  on  account  of  injuries  received  by  employees, 
are  proper  deductions  as  "ordinary  and  necessary  expenses;"  gifts  or  gratui- 
ties to  employees  in  the  service  of  a  corporation  are  not  properly  deductible 
in  ascertaining  net  income.  Donations  made  for  purposes  connected  with  the 
operation  of  the  property  when  limited  to  charitable  institutions,  hospitals,  or 
efinentional  iiistitiitions,  conducted  for  tlie  benefit  of  its  employees,  or  their 
depf-ndcnts.  shall  be  proper  as  a  deduction  under  the  same  head. 

58.  Where  allowances  on  account  of  salaries  are  deemed  excessive  and  for 
the  piirpoH<-  of  rvadintr  the  tax  (hie,  investigation  will  be  made,  and  if  the 
facts  warrant  [)ros<'cution  will  follow. 


Appejtdixes.  235 

69.  Interest  paid  on  time  depoaits  and  deposits  subject  to  check  constitutes 
a  proper  deduction  from  tlio  auioiuil  of  gross  income  during  the  year. 

60.  Interest  on  portions  of  bonded  or  other  indebtedness  bearing  difTerent 
rates  of  interest  may  be  deducted  from  gross  income  during  the  year,  pro- 
vided the  aggregate  amount  of  such  indebtedness  does  not  exceed  the  paid-up 
capital  stock  of  th  corporation. 

61.  Interest  paid  during  the  year  on  notes  given  prior  to  January  1,  1909, 
to  be  prorated.  But  interest  on  notes  given  in  1909,  and  payable  subsequent 
to  December,  1909,  unless  charged  on  the  company's  books,  is  not  a  proper 
deduction  from  the  income  of  that  year. 

62.  Interest,  taxes,  or  other  items  allowable  as  deductions,  accruing  prior  to 
January  1,  1909,  are  not  allowable  deductions  from  the  gross  income  of  years 
subsequent  thereto. 

63.  Unearned  premiums  set  aside  by  insurance  companies  as  reserve  not  to 
be  included  as  income  until  earned. 

64.  Funds  set  aside  by  company  for  insuring  their  own  property  not  a  proper 
deduction. 

65.  As  the  tax  imposed  is  measured  by  and  is  not  a  tax  upon  the  net  receipts 
of  corporations,  etc.,  interest  received  during  the  year  on  government  bonds 
is  not  a  proper  deduction  from  such  income  in  determining  the  amount  of  tax 
due.     (Opin.  Atty.-Gen.  T.  D.  1583.) 

66.  State,  county  or  municipal  taxes  paid  during  the  year  a  proper  deduc 
tion  in  ascertaining  the  net  income  of  corporations. 

67.  Import  duties  or  taxes  if  included  in  arriving  at  cost  of  goods  are  not 
deductible  under  the  head  of  taxes  paid  during  the  year. 

68.  Bad  debts,  if  so  charged  off  the  company's  books  during  the  year,  are 
proper  deductions.  But  such  debts,  if  subsequently  collected,  must  be  treated 
as  income. 

Depreciation. 

69.  Where  increase  or  decrease  during  the  year  in  the  value  of  real  estate 
acquired  in  previous  years,  sold  or  held  for  sale,  is  taken  up  on  the  books 
and  the  rate  cannot  be  accurately  determined  with  respect  to  individual  years, 
such  increase  or  decrease  may  be  prorated  as  provided  by  regulations  in  cases 
of  sale  of  capital  assets. 

70.  Premiums  on  stocks  and  bonds  arbitrarily  charged  off  on  the  books  of  a 
corporation  do  not  constitute  a  proper  deduction  on  account  of  depreciation, 
unless  there  shall  have  been  an  actual  shrinkage  in  value  of  such  stocks  and 
bonds  to  the  extent  of  the  deduction  claimed  during  the  year  for  which  the 
return  is  made. 

71.  Net  income  on  uncompleted  contracts  may  be  estimated  on  the  basis  of 
the  percentage  of  the  work  completed  as  compared  with  the  contract  price  of 
the  whole  work. 

72.  Cost  of  drilling  new  wells  by  oil  corporations  is  considered  betterments 
and  additions  to  the  capital  assets  of  the  corporation.  The  expense  of  drilling 
dry  wells  may,  however,  be  charged  to  profit  and  loss. 

73.  "  Good  will  "  represents  the  value  of  a  business  over  and  above  the 
value  of  the  property,  and  is  chargeable  only  to  capital  investment  account 
and  is  not  an  allowable  deduction  from  the  income  of  a  corporation. 

74.  Discounts,  other  than  bank  discounts  on  notes  executed   by  a  corpora 


236        Fedekal  Cokpoeation  Tax  Law. 

tion,  should  be  segregated  from  the  interest  item  on  the  return,  and  should  be 
included  under  expenses,  item  4. 

75.  The  mere  removal  of  timber  by  cutting  from  timber  lands,  unless  the 
timber  is  otherwise  disposed  of  through  sales  or  j'laiit  operations,  is  consid- 
ered simply  a  change  in  form  of  assets.  If  said  timber  is  disposed  of  through 
sales  or  otherwise  it  is  to  be  accounted  for  in  accordance  with  regulations  gov- 
erning disposition  of  capital  and  other  assets. 

7G.  Deduction  on  account  of  depreciation  of  property  must  be  based  on  life 
lime  of  property,  its  cost,  value,  and  use. 

77.  Loss  due  to  voluntary  removal  of  buildings,  etc.,  incident  to  improve- 
ments is  either  a  proper  charge  to  the  cost  of  the  new  additions  or  to  depre- 
ciation already  provided,  as  the  facts  may  indicate,  but  in  no  case  is  it  a 
X^roper  deduction  in  determining  net  income,  except  as  it  may  be  reflected  in 
the  reasonable  amount  allowable  as  a  deduction  for  depreciation. 

78.  Depreciation  of  company's  stock  a  loss  to  the  stockholders,  but  not  a 
loss  to  the  company  issuing  the  same,  and  therefore  not  a  proper  deduction. 

Publicity. 

79.  A  person  who  as  trustee  or  in  any  other  fiduciary  relation  has  the 
ownership  or  possessory  right  to  stock  in  a  corporation  is  a  stockholder  in 
such  corporation  within  the  equity  of  the  rule  set  down  in  Treasury  Decision 
No.  1665,  governing  the  publicity  of  returns.  (Opin.  Atty.-Gen.  Dec.  27, 
1910.) 

Depreciation  in  ^finerals,  Oils,  etc. 

80.  In  case  of  corporations  whose  business  consists  in  part  or  wholly  .)f 
mining,  producing,  and  disposing  of  deposits  of  nature  (ores,  coals,  gas,  petro- 
leum, and  sundry  minerals)  the  conduct  of  such  business  will  be  understood 
to  comprehend  two  classes  of  gains  or  losses,  viz.: 

(a)  The  gain  or  loss  resulting  from  the  sale  of  capital  assets,  i.  €.,  either 
the  increment,  or  the  loss,  arising  tlirough  possessing  over  a  period  of  time 
the  investment  in  the  same. 

(6)  The  trading  or  commercial  gain  attached  to  the  conduct  of  the  indus- 
try, the  employment  of  working  cajJital,  the  effort  and  risk  involved. 

81.  In  the  ascertainment  of  net  income  deduction  will  be  allowed  for  depre- 
ciation ariHJng  from  exhaustion  of  deposits  of  ore,  mineral,  etc.,  and  for  de- 
preciation and  obsolescence  of  improvements,  in  accordance  with  general  regu- 
lations respi'cting  dejireeiation  allowances,  on  tlie  basis  of  the  original  capital 
investment  cost  of  the  properties  concerned  to  tlie  company  reporting. 

82.  A  further  deduction  will  also  l)e  allowed,  through  not  including  the  same 
at  all  in  the  item  of  gross  income  (item  3,  Form  6.'}7),  for  the  unearned  incre 
mi-nt    re|)resented    in    such    prop«'rties   as   at   January    1,    1909,   which    will    l)e 
determined  in  general  as  follows: 

83.  An  estimate  should  be  made  as  nf  January  1,  1909,  of  the  fair  market 
valur  at  tliat  date  of  the  minerals,  etc.,  in  deposit.  This  estimate  should  be 
fonned  nn  tlie  basis  of  tlie  disposal  value  of  the  minerals  in  total  and  exclnsive 
of  value  of  improvements  and  development  work.  Tliis  valuation  sliould  also 
he  reduced  to  a  unit  value  —  per  ton,  barrel,  etc. 

\oTF. — Vnhies  as  nforesnid  slioiild  not  be  estimated  on  the  bnsis  of  the 
asHumed  salabh'  value  of  the  output    under  current  operative  conditions,  less 


APPEJSfDIXES.  23Y 

the  actual  coat  of  production,  because,  as  hereinbefore  stated,  the  selling  price 
under  such  conditions  comprehends  a  profit  both  for  carrying  the  investment 
in  minerals,  improvements,  and  vi^orking  capital,  and  for  conducting  opera- 
tions in  respect  of  production  and  disposal  of  product.  The  value  to  be  de- 
termined as  stated  must  be  on  the  basis  of  the  salable  value  of  the  entir«j 
deposit  of  the  aggregate  units  of  minerals  considered  en  bloc  if  disposed  of  in 
that  form.  Nor  must  such  valuation  comprehend  any  speculative  value  which 
might  attach  to  a  sale  of  the  minerals  en  bloc,  i.  e.,  a  value  which  might  be 
obtained  on  the  ground  that  the  future  would  develope  a  much  greater  reserve 
of  mineral  deposits  than  were  believed  to  exist  at  the  time  estimate  as  of 
January  1,  1909,  was  formed.  Any  value  of  this  latter  character  would  attach 
obviously  to  such  additional  reserves  when  developed  in  future. 

84.  The  unit  value  as  of  January  1,  1909,  ascertained  as  above  outlined, 
would  indicate  the  value  to  be  attached  at  that  date  to  the  capital  assets  dis- 
posed of  during  any  calendar  year  succeeding,  and  should  be  used  in  deter- 
mining the  unearned  increment  at  January  1,  1909,  which  may  be  excluded 
entirely  from  the  item  of  gross  income,  as  before  explained,  in  following  man- 
ner, viz: 

Value  at  January  1,  1909,  determined  in  manner  outlined,  of  minerals, 
etc.,  which  may  be  removed  and  disposed  of  in  any  year  subsequent 

thereto $ 

Less  the  following: 

(o)  Proportion  of  depreciation  charge  applying  to  exhaus- 
tion of  minerals  disposed  of,  ascertained  as  first  ex- 
plained herein  on  basis  of  original  cost $ 

(6)   Royalty  paid,  if  any,  on  minerals  disposed  of 

Balance,  being  unearned  increment  at  January  1,  1909,  to 

be  excluded  from  gross  income  item 

85.  The  precise  detailed  manner  in  which  the  estimate  of  value  of  mineral, 
etc.,  as  at  January  1,  1909,  shall  be  formed,  must  naturally  be  determined 
upon  by  each  corporation  interested,  but  formal  record  of  such  estimates, 
together  with  all  sustaining  information,  should  be  carefully  filed  so  as  to  be 
readily  accessible  for  reference.  Values  as  stated,  as  determined  at  January 
1,  1909,  should  be  used  in  compilation  in  all  subsequent  years'  excise-tax 
returns.  The  question  as  to  whether  it  subsequently  develops  the  property 
possessed  a  greater  quantity  of  mineral,  etc.,  reserve  than  was  in  the  aggre- 
gate estimated  as  of  January  1,  1909,  is  immaterial.  Any  excess  which  may 
be  developed  will  be  considered  as  possessing  the  same  value  at  January  1, 
1909,  as  that  which  then  may  have  been  known  to  be  in  the  property. 

86.  Each  excise-tax  return  (Form  637)  should  be  accompanied  with  memo- 
randum setting  forth  the  extent  in  amount  of  the  exclusion  made  from  the 
item  gross  income  for  unearned  increment  realized  during  the  year,  as  above 
outlined. 

87.  As  the  amount  to  be  deducted  for  depreciation  (paragraph  2  preceding) 
is  to  be  formed  on  basis  of  the  estimated  reserve  of  minerals,  etc..  it  follows 
that  if  it  develops  such  estimate  is  understated,  the  cost  investment  in  tlif 
capital  asset  may  be  wholly  extinguished  before  all  mineral  reserves  are 
removed.  When  this  is  reached,  further  deductions  for  exhaustion  or  Tnjinrnln 
should  be  discontinued,  but  in  such  event,  it  will  be  noted,  the  allowa-icc  fir 


538         Federal  Corporation  Tax  Law. 

unearned  increment  which  is  to  be  excluded  entirely  from  gross  income  will  be 
correspondingly  increased. 

88.  In  case  of  corporations  leasing  mines  and  paying  royalties  on  minerals, 
etc.,  removed,  the  royalties  paid  are  to  be  treated  as  expenses  and  deducted  in 
ascertaining  net  income,  as  provided  in  general  regulations.  Any  leasehold 
investment  which  the  operating  corporation  may  have  in  such  properties, 
either  through  a  payment  originally  made  for  acquirement  thereof  or  for  im- 
provements made  upon  the  property,  to  be  accounted  for  in  accordance  with 
regulations  governing  depreciation  allowances  and  disposition  of  capital  assets. 

89.  In  respect  to  properties  of  the  character  in  question  which  may  be 
acquired  by  a  corporation  after  January  1,  1909,  a  deduction  will  be  allowed 
only  as  to  depreciation  arising  from  exhaustion  based  on  original  cost;  no 
exclusion  from  gross  income  can  be  made  for  unearned  increment,  as  profit 
arising  in  sale  of  such  capital  assets  applies  wholly  to  the  period  subsequent 
to  January  1,  1909. 


Appk.xdixes.  239 


APPENDIX  Z. 


(T.  D.  1685.) 


This  circular  contains  a  copy  of  the  United  States  Supreme  Court  decision 
in  Flint  v.  Stone  Tracy  Co.  et  al.,  decided  March  13th,  1911,  and  is  given  in 
full,  ante,  pages  22-42. 


240        Fedebal  Cokpokation  Tax  Law. 


APPENDIX  AA. 

(T.  D.  1686.) 

Special  Excise  Tax   on   CoBPoaAxiONs  —  Opinion  of  the  United  States 

Supreme  Coubt. 

It  was  the  intention  of  Congress  to  embrace  within  the  statute,  imposing  a 
special  excise  tax  on  corporations,  only  such  corporations  and  joint  stock  asso- 
ciations as  are  organized  under  some  statute,  or  derive  from  that  source  some 
quality  or  benefit  not  existing  at  the  common  law. 

Treasuby  Department, 
Office  of  Commissioner  of  Internal  Revenue, 

Washington,  D.  C,  March  20,  1911. 

The  appended  decision  of  the  Supreme  Court  of  the  United  States  in  the 
cases  of  Amory  Eliot,  appellant,  v.  James  G.  Freeman  et  al.,  and  Maine  Bap- 
tist Missionary  Convention,  appellant,  r.  Charles  E.  Cotting  et  al.,  is  pub- 
lished for  the  information  of  internal-revenue  officers  and  others  concerned. 

Royal  E.  Cabell, 

Commissioner. 

Supreme  Coubt  of  the  United  States.    October  Tebm,  1910.    Nos.  448  and 

496. 

Amory  Eliot,  appellant,  v.  James  G.  Freeman,  Robert  A.  Boit,  Nathaniel 
Thayer,  and  Robert  H.  (iardnrr,  and  Maine  Baptist  Missionary  Conven- 
tion, appellant,  v.  Charles  E.  Cotting  and  Charles  F.  Adams,  2d,  Trustees, 
etc. 

Appeals  from  the  Circuit  Court  of  the  United  States  for  the  district  of  Massa- 
chusetts. 

[March  13.  1911.1 

Mr.  .Justice  Day  delivered  the  opinion  of  the  court: 

These  cases  present  facts  difTprin<;  from  those  involved  in  the  consideration 
of  the  corporation  tax  ci\s<"s  just  (iccidcd.      Flint  r.  Stone  Tracy  Co.,  ante. 

In  No.  448  the  question  is  raisod  as  to  the  right  to  lay  a  tax  under  this 
statute  upon  a  certain  trust  formed  for  tlu>  purpose  of  purchasing,  improving, 
holding,  and  si'lling  lands  and  hiiildings  in  Boston,  known  as  "the  Cusliing 
real  estate  trust."  Hy  the  terms  of  tlic  (nisi  tlic  prop-rty  was  conveyeil  to 
certain  trustees,  who  executed  a  triist  agreement  whereby  the  management  of 
flic  propcrfy  was  vested  in  tlic  trustees,  who  had  absolute  control  and  author- 
it  v  over  the  san:c.  with  ri^'lit  to  sell  for  cash  or  credit,  at  public  or  private 
sjile,  and  with  full  power  to  tunniigc  the  |)ropcrty  as  tliey  dccTiicd  Iwst  for  the 
interest  of  the  Mli.uclinldcrs.  I'lic  sluirclidldcrs  arc  to  be  paid  dividends  frcMi 
time  to  time  frmn  the  net  inrome  or  net  proceeds  of  the  j)ropertv,  and  20 
yi'.'irH  after  tlie  t(  rmin.at  inn  of  lives  in  being  tbr  property  to  be  sold  nn<l  the 
proceeds  of  the  sale  to  be  divided  among  the  parties   interested.      Tlic  trustees 


Appendixes.  241 

were  to  issue  4,800  shares  to  the  owners  of  the  property  at  $100  each,  th« 
owners  to  receive  a  number  of  shares  equal  to  the  value  of  the  interest  con- 
veyed to  the  trustees.  The  shares  were  transferable  on  the  books  of  the 
trustees,  and  on  surrender  of  the  certificate  and  the  transfer  thereof  in  writing 
a  new  certificate  is  to  issue  to  the  transferee.  No  shareholder  had  any  legal 
title  or  interest  in  the  property  and  no  right  to  call  for  the  partition  thereof 
during  the  continuance  of  the  trust.  The  legal  representatives  of  a  shareholder 
are  to  succeed  to  the  interest  of  a  shareholder,  the  interest  passing  by  opera- 
tion of  law.  Provision  is  made  for  the  termination  of  the  trust  by  an  instru 
ment  or  instruments  in  writing,  signed  by  not  less  than  three-fourths  of  the 
value  of  stock  held  by  shareholders.  Meetings  of  the  shareholders  are  held 
at  their  discretion,  or  whenever  requested  in  writing  by  five  shareholders,  or  by 
shareholders  owning  not  less  than  one  tenth  of  the  shares  in  value. 

The  trust  has  a  building,  leasing  it  to  a  single  tenant.  It  also  maintains 
and  operates  an  office  building  with  elevator  service,  janitor  service,  etc. 

Case  No.  496  involves  what  is  known  as  a  "  department  store  trust."  It 
was  created  by  deed  and  formed  for  the  purpose  of  purchasing  and  holding 
certain  parcels  of  land  in  the  city  of  Boston,  and  erecting  a  building  thereon 
suitable  for  a  department  store.  The  land  and  buildings  are  leased  to  one 
tenant  for  a  period  of  30  years.  The  trust  had  transferable  certificates  issued 
to  shareholders  at  the  par  value  of  $100  each.  The  trustees  conduct  the  affairs 
of  the  trust,  manage  the  property,  and  pay  dividends  when  declared.  Tlie 
shareholders  meet  annually,  and  a  majority  of  them  have  the  power  to  elect 
and  depose  trustees  and  to  alter  and  amend  the  terms  of  the  trust  agreement. 
This  trust  also  continues  for  certain  lives  in  being  and  for  20  years  thereafter. 
Each  of  the  trusts  involved  in  these  cases  is  in  receipt  of  a  net  income  exceed- 
ing $5,000. 

Under  the  terms  of  the  corporatior  tax  act,  corporations  and  joint  stock 
associations  must  be  such  as  are  "  now  or  hereafter  organized  under  the  laws 
of  the  United  States  or  of  any  State  or  Territory  of  the  United  States  or 
under  the  acts  of  Congress  applicable  to  Alaska  or  the  District  of  Columbia." 

The  pertinent  question  in  this  connection  is:  Are  these  trusts  organized 
under  the  laws  of  the  State?  As  we  have  construed  the  corporation  tax  act 
in  the  previous  cases,  Flint  r.  Stone  Tracey  Co.,  ante,  the  tax  is  imposed  upon 
doing  business  in  a  corporation  or  quasi  corporate  capacity;  that  is,  with  the 
facility  or  advantage  of  corporate  organization. 

It  was  the  purpose  of  the  act  to  treat  corporations  and  joint  stock  com- 
panies, similarly  organized,  in  the  same  way,  and  assess  them  upon  the  facility 
in  doing  business  which  is  substantially  the  same  in  both  forms  of  organiza- 
tion. Joint  stock  organizations  are  not  infrequently  organized  under  the 
statute  laws  of  a  State,  deriving  therefrom,  in  a  large  measure,  the  character- 
istics of  a  corporation. 

The  language  of  the  act  "  *  *  »  now  or  hereafter  organized  under  the 
laws  of  the  Ignited  States,"  etc.,  imports  an  organization  deriving  power  from 
statutory  enactment.  The  statute  does  not  say  under  the  law  of  the  T^nit^'rl 
States,  or  a  State,  or  lawful  in  the  United  States  or  in  anv  State,  but  is  made 
applicable  to  such  as  are  organized  under  the  laws  of  the  United  States,  etc. 
The  description  of  the  corporation  or  joint-stock  association  as  one  organized 
under  the  laws  of  a  State  at  once  suggests  that  they  are  such  as  are  the 
Fed.  Corp.  Tax  —  16 


242         Federal  Corporation  Tax  Law. 

creation  of  statutory  law.  from  which  they  derive  their  powers  and  are  quali- 
fied to  carry  on  their  operations. 

A  trust  of  the  character  of  those  here  involved  can  hardly  be  said  to  be 
organized,  within  the  ordinary  meaning  of  that  term;  it  certainly  is  not  or- 
ganized under  statutory  laws  as  corporations  are.  The  difference  between 
joint  stock  associations  at  common  law  and  those  organized  under  statutes 
are  well  recognized  (Cook  on  Corporations,  sec.  505)  : 

There  is  an  essential  difference  between  a  joint-stock  company  as  it  exiai? 
at  common  law  and  a  joint-stock  company  having  extensive  statutory  powern 
conferred  upon  it  by  the  State  within  which  it  is  organized.  The  latter  kind 
of  joint-stock  company  is  found  in  England  and  in  the  State  of  New  York.  To 
such  an  extent  have  these  statutory  powers  been  conferred  on  joint  stock  com- 
panies that  the  only  substantial  difference  between  them  and  corporations  is 
that  the  members  are  not  exempt  from  liability  as  partners  for  the  debts  of 
the  company. 

The  two  cases  now  under  consideration  embrace  trusts  which  do  not  derive 
any  benefit  from  and  are  not  organized  under  the  statutory  laws  of  Massachu- 
setts. Joint  stock  companies  of  the  statutory  character  are  not  known  to  the 
laws  of  that  Commonwealth.  Ricker  v.  American  Tea  Co.  (140  Mass.  346.) 
These  trusts  do  not  have  perpetual  succession,  but  end  with  lives  in  being  and 
20  years  thereafter. 

Entertaining  the  view  that  it  was  the  intention  of  Congress  to  embrace 
within  the  corporation  tax  statute  only  such  corporations  and  joint  stock 
associations  as  are  organized  xinder  some  statute  or  derive  from  that  source 
some  quality  or  benefit  not  existing  at  the  common  law,  we  are  of  opinion  that 
the  real  estate  trusts  involved  in  these  two  cases  are  not  within  the  terms  of 
the  act.  In  that  view  the  decrees  in  both  cases  will  be  reversed  and  the  same 
remanded  to  the  Circuit  Court  of  the  United  States  for  the  district  of  Massa- 
chusetts with  directions  to  overrule  the  aemurrers  and  for  further  proceedings 
consistent  with  this  opinion. 

Reversed. 


o.H    -- 


Appej^dixes.  243 


APPENDIX  BB. 

(T.  D.   1687.) 

Special  Excise  Tax  on  Corporations  —  Opinion  op  the  United  States 

Supreme  Court. 

Where  a  corporation  originally  organized  for  the  purpose  of  owning  ami 
renting  an  office  building,  leased  the  property  for  130  years  and  reorganized 
and  practically  went  out  of  business,  its  sole  authority  being  to  hold  the  title 
subject  to  the  lease,  and  to  receive  and  distribute  the  rentals  accruing  there- 
under, or  the  proceeds  of  sale,  if  the  property  should  be  sold,  held  not  liable 
to  the  special  excise  tax  under  section  38  of  the  act  of  August  5,  1909. 

Treasury  Department, 
Office  of  Commissioner  of  Internal  Revenue, 

Washington,  D.  C,  March  20,  1911. 
The  appended  decision  of  the  Supreme  Court  of  the  United  States  in  the 
case  of  Ary  E.  Zonne,  appellant,  v.  Minneapolis  Syndicate  et  al.,  is  published 
for  the  information  of  internal-revenue  officers  and  others  concerned. 

Royal  E.  Cabell, 

Commissioner. 

SuPBEME  Court  of  the  United  States.    October  Term,  1910.    No.  627. 

Ary  E.  Zonne,  appellant,  v.  Minneapolis  (■iyndicate,  John  De  Laittre,  Treasurer, 
and  J.  Frank  Conklin,  Assistant  Treasurer. 

Appeal  from  the  Circuit  Court  of  the  United  States  for  the  district  of  Minne- 
sota. 
[March  13,  1911.] 
Mr.  Justice  Day  delivered  the  opinion  of  the  court: 

This  case  involves  the  validity  of  the  corporation  tax  act  just  passed  upon 
in  No.  407,  Flint  v.  Stone  Tracy  Co.,  ante. 

The  case  presents  a  peculiarity  of  corporate  organization  and  purpose  not 
involved  in  the  case  just  decided.  The  Minneapolis  syndicate,  as  the  allega- 
tions of  the  bill,  admitted  by  the  demurrer,  show,  was  originally  organized 
for  and  engaged  in  the  business  of  letting  stores  and  offices  in  a  building 
owned  by  it,  and  collecting  and  receiving  rents  therefor.  On  the  27th  of  De- 
cember, 1906,  the  corporation  demised  and  let  all  of  tracts,  lots,  and  parcels 
of  land  belonging  to  it,  being  the  westerly  half  of  block  87  in  the  city  of  Minne 
apolis,  to  Richard  M.  Bradley,  Arthur  Lyman,  and  Russell  Tyson  as  trustees 
for  the  term  of  130  years  from  January  1.  1907,  at  an  annual  rental  of  $61,000. 
to  be  paid  by  said  lessees  to  said  corporation.  At  that  time  the  corporation 
caused  its  articles  of  incorporation,  which  had  theretofore  been  those  of  a  cor- 
poration organized  for  profit,  to  be  so  amended  as  to  read : 

The  sole  purpose  of  the  corporation  shall  be  to  hold  the  title  to  the  westerly 
one-half  of  block  87  of  the  town  of  Minneapolis,  now  vested  in  the  corporation 
.subject  to  a  lease  thereof  for  a  term  of  130  years  from  January  1,  1907,  and. 


244        Federal  Cobpokation  Tax  Law. 

for  the  convenience  of  its  stockholders,  to  receive,  and  to  di3tribute  among 
them,  from  time  to  time,  the  rentals  that  accrue  under  said  lease,  and  the 
proceedo  of  any  disposition  of  said  land. 

As  we  have  construed  the  corporation-tax  law  (Flint  v.  Stone  Tracy  Co., 
ante),  it  provides  for  an  excise  upon  the  carrying  on  or  doing  of  business  in  a 
corporate  capacity.  We  have  held  in  the  preceding  cases  that  corporationa 
organized  for  profit  under  the  laws  of  the  State,  authorized  to  manage  and 
rent  real  estate,  and  being  so  engaged,  are  doing  business  within  the  meaning 
of  the  law,  and  are  therefore  liable  to  the  tax  imposed. 

The  corporation  involved  in  the  present  case,  as  originally  organized  and 
owning  and  renting  an  office  building,  was  doing  business  within  the  meaning 
of  the  statute  as  we  have  construed  it.  Upon  the  record  now  presented  we 
are  of  opinion  that  the  Minneapolis  syndicate,  after  the  demise  of  the  property 
and  reorganization  of  the  corporation,  was  not  engaged  in  doing  business 
within  the  meaning  of  the  act.  It  had  wholly  parted  with  control  and  manage- 
ment of  the  property;  its  sole  authority  vas  to  hold  the  title  subject  to  the 
lease  for  130  years  to  receive  and  distribute  the  rentals  which  might  accrue 
under  the  terms  of  the  lease,  or  the  proceeds  of  any  sale  of  the  land  if  it 
should  be  sold.  The  corporation  had  practically  gone  out  of  business  in  con- 
nection with  the  property  and  had  disqualified  itself  by  the  terms  of  reorgani- 
zation from  any  activity  in  respect  to  it.  We  are  of  opinion  that  the  corpora- 
tion was  not  doing  business  in  such  wise  as  to  make  it  subject  to  the  tax 
imposed  by  the  act  of  1909.  Holding  this  view,  we  think  the  court  below  erred 
in  sustaining  the  demurrer  to  the  bill.  The  decree  of  the  court  below  is  there- 
fore reversed  and  the  cause  remanded  to  the  Circuit  Court  of  the  United 
States  for  the  district  of  Minnesota  with  direction  to  overrule  the  demurrer 
and  for  further  proceedings  consistent  with  this  opinion. 

Reversed. 


Appendixes.  245 


APPENDIX  CC. 

OPINIONS  OF  ATTORNEY-GENERAL. 

Department  of  Justice, 

January  13,  1910. 
SiB:  I  have  the  honor  to  acknowledge  receipt  of  your  communication  of 
December  23,  1909,  in  which  you  request  my  opinion  as  to  whether  or  not 
under  section  38  of  the  act  of  August  5,  1909  (36  Stat.  112)  corporations  sub- 
ject to  the  tax  provided  for  therein  should  include  in  the  returns  required  to 
be  made  as  a  part  of  their  gross  income,  the  interest  on  United  States  bonds 
held  by  them,  and  in  reply  thereto  will  say: 

By  section  38  of  said  act  it  is  provided:  First,  that  the  corporations  speci- 
fied therein  "  shall  be  subject  to  pay  annually  a  special  excise  tax  with  respect 
to  the  carrying  on  or  doing  business  by  such  corporation  —  equivalent  to  1 
per  centum  upon  the  entire  net  income  over  and  above  five  thousand  dollars 
received  by  it  from  all  sources  during  such  year,  exclusive  of  amounts  received 
by  it  as  dividends  upon  stock  of  other  corporations,"  etc. ;  second,  that  the 
iipt  income  of  a  corporation  shall  be  ascertained  by  deducting  from  the  gross 
amount  of  the  income  (first)  the  expenses  described ;  (second)  losses  described ; 
(third)  interest  paid  on  its  indebtedness,  not  exceeding  the  paid-up  capital, 
and  in  case  of  banking  and  trust  companies  interest  paid  on  deposits; 
(fourth)  all  sums  paid  within  the  year  as  dividends  upon  the  stock  of  other 
corporations  subject  to  the  tax  imposed;  and  (fifth),  that  there  shall  be 
deducted  from  the  net  income  of  such  corporation,  ascertained  as  provided, 
the  sum  of  five  thousand  dollars,  and  the  tax  shall  b«  computed  upon  the 
remainder  of  said  net  income. 

The  tax  here  imposed  is  not  a  tax  upon  the  property  of  the  corporation,  but 
is  specifically  designated  as  "  a  special  excise  tax  with  respect  to  the  carrying 
on  or  doing  business  by  such  corporation."  That  is,  it  is  in  the  nature  of  a 
tax  imposed  upon  the  privilege  of  carrying  on  the  business;  and  the  net  income, 
ascertained  as  described,  was  adopted  by  Congress  only  as  a  basis  for  com- 
puting what  the  amount  of  the  assessment  should  be. 

In  the  passage  of  this  act,  Congress  doubtless  had  in  mind  the  decision  of 
the  Supreme  Court  in  the  case  of  Pollock  r.  Farmers  Loan  &  Trust  Company 
(157  U.  S.  429),  known  as  the  income-tax  case;  and  it  was  no  doubt  its  inten- 
tion to  avoid  every  character  of  taxation  that  might  be  regarded  as  a  direct 
tax ;  and,  consequently,  it  carefully  avoided  imposing  a  tax  upon  the  property 
of  the  corporation  or  upon  ita  income,  and  fixed  and  designated  it  as  a  tax 
upon  the  carrying  on  or  doing  of  its  business. 

Furthermore  the  act  is  specific  in  its  terms  and  enters  into  minute  details 
with  reference  to  how  the  net  income  of  the  corporation,  for  the  purpose  of 
fixing  the  amount  of  the  tax,  shall  be  computed;  and  this  particularity  necee- 
earily  excludes  the  intention  that  any  other  provision  can,  by  implication  be 
read  into  the  act. 


246  Federal  Cokpokatiojs   Tax  Law. 

I  am  therefore  of  the  opinion  that  in  computing  the  amount  of  the  grass 
income,  corporations  owning  United  States  bonds  should  include  the  interest 
received  thereon,  and  that  such  interest  should  not  be  deducted  from  the  gross 
income  for  the  purpose  of  ascertaining  the  net  income  which  serves  as  a  basis 
for  computing  the  amount  of  taxes  to  be  paid. 

Respectfully, 

Gkoegb  W.  Wickbrsham. 
The  Secretary  of  the  Treasury. 


AppEJSDixjis.  247 


APPENDIX  DD. 

Department  of  Justice, 

January  24,  1910. 

SIR:  —  In  reply  to  your  communication  of  January  15,  1910,  in  which  you  ask 
my  opinion  whether  under  section  38  of  the  act  of  August  5,  1909  (36  Stat. 
112)  known  as  the  "Corporation  Tax  Law,"  in  computing  its  net  income,  a 
corporation  may  deduct  from  its  gross  income  dividends  received  by  it  from 
another  corporation  of  a  class  to  which  the  act  is  applicable,  but  which  does 
not  have  a  net  income  to  exceed  $5,000,  I  have  the  honor  to  say: 

Those  parts  of  the  act  which  bear  upon  this  question  are  as  follows: 

"  That  every  corporation  *  *  *  shall  be  subject  to  pay  annually  a  special  excise 
tax  with  respect  to  the  carrying  on  or  doing  business  by  such  corporation, 
joint  stock  company  or  association,  or  insurance  company,  equivalent  to  one 
per  centum  upon  the  entire  net  income  over  above  five  thousand  dollars  re- 
(•<'ived  by  it  from  all  sources  during  such  year,  exclusive  of  amounts  received 
by  it  as  dividends  upon  stock  of  other  corporations,  joint  stock  companies  or 
associations,  or  insurance  companies,  subject  to  the  tax  hereby  imposed ;  ♦  *  ♦ 
Provided,  however,  that  nothing  in  this  section  contained  shall  apply  to  labor, 
.({.'licultural  or  horticultural  organizations,  or  to  fraternal  beneficiary  so- 
cK'ties,  orders  or  associations  operating  under  the  lodge  system,  and  providing 
for  the  payment  of  life,  sick,  accident  and  other  Ijenefits  to  the  members  of 
such  societies,  orders  or  associations,  and  dependents  of  such  members,  nor 
to  domestic  building  and  loan  associations  organized  and  operated  exclusively 
for  the  mutual  benefit  of  their  members,  nor  to  any  corporation  or  association 
organized  and  operated  exclusively  for  religious,  charitable  or  educational 
purposes,  no  part  of  the  net  income  of  which  inures  to  the  benefit  of  any 
private  stockholder  or  individual. 

'•  Second.  Such  net  income  shall  be  ascertained  by  deducting  from  the  gross 
amount  of  the  income  of  such  corporation  *  *  *  "  fifth  all  amounts  received  by 
it  within  tlie  year  as  dividends  upon  stock  of  other  corporations,  joint  stock 
companies,  or  associations,  or  insurance  companies,  subject  to  the  tax  hereby 
imposed.     *     »     » 

"  Third.  There  shall  be  deducted  from  the  amount  of  the  net  income  '.f 
each  of  such  corporations,  joint  stock  companies  or  associations,  or  insurance 
companies,  ascertained  as  provided  in  the  foregoing  paragraphs  of  this  sec 
tion.  the  sum  of  five  thousand  dollars,  and  said  tax  shall  be  computed  npon  the 
remainder  of  said  net  income  of  such  corporation,  for  the  year  ending  De- 
cember thirty-first,  nineteen  hundred  and  nine,  and  for  each  calendar  year 
fh.-reafter."     *     •      * 

The  question   is   whether   or  not  a   corporation  whose   net   income  does  not 
exceed  $5,000.  and  which,  therefore,  pays  no  tax  under  this  statute,  is  a  cor 
poration  "  subject  to  the   tax  "  thereby  imposed   within   the   meaning  of  the 
act. 

When  the  language  of  the  act  is  considered,  together  with  the  clear  intent 
of  those  who  drafted  its  provisions,  I  think  there  can  be  no  doubt  about  the 


248         Fedeeal  Corporation  Tax  Law. 

answer  that  should  be  given  to  this  inquiry.  The  act  expressly  declares  that 
every  corporation  of  the  kinds  mentioned  "  shall  be  subject  to  pay  annually 
a  special  excise  tax,"  and  then  provides  a  method  for  the  computation  of  the 
amount  to  be  paid.  Therefore,  every  one  of  such  corporations  falls  within  the 
provisions  of  the  act,  and  must  make  out  a  report  of  its  business,  as  therein 
required,  and  in  every  respect  comply  with  its  terms.  It  may  turn  out  when 
the  calculation  is  made  on  the  basis  specified  that  no  tax  will  be  assessed 
against  it,  not  because  the  corporation  is  not  subject  to  the  tax,  but  because 
its  earning  capacity  is  not  sufficient  to  necessitate  its  imposition  for  that 
year,  just  as  every  male  person  within  certain  ages  may  be  subject  to  draft 
during  the  time  of  war,  yet  the  conditions  necessitating  the  draft  may  never 
arise. 

This  manifest  meaning  of  the  language  is  clearly  in  accord  with  the  legisla- 
tive intent.  The  purpose  was  to  exclude  $5,000  of  a  corporation's  earnings 
from  consideration  in  estimating  the  amount  of  taxes  which  it  should  pay, 
and,  further,  that  such  $5,000  should  remain  exempt  from  such  estimate, 
though  it  should  pass  by  way  of  a  dividend  into  the  hands  of  other  corpora- 
tions, just  as  it  was  the  intention  that  when  any  part  of  a  corporation's 
earnings  had  once  entered  into  an  estimate,  as  a  result  of  which  taxes  were 
imposed,  such  sum  should  not  again  be  considered  in  determining  the  amount 
to  be  paid  by  another  corporation. 

The  effect  of  the  contrary  construction  shows  that  such  must  have  been  the 
purpose  of  this  provision.  For,  suppose  a  corporation  holds  50  per  cent  of 
the  capita]  stock  of  two  corporations,  one  of  which  has  a  net  income  of  $5,500, 
which  it  disburses  as  dividends.  According  to  the  theory  that  the  first  of 
these  dividend  paying  corporations  is  not  subject  to  this  tax,  while  the  second 
one  is,  the  corporation  holding  their  stock  cannot  deduct  any  part  of  the  divi- 
dends received  from  the  first  corporation  in  estimating  its  net  income,  but 
can  deduct  of  tliat  received  from  the  second  one  not  only  tl\e  $250,  the  50  per 
cent  of  the  excess  over  the  $5,000  whicli  was  deducted  from  the  gross  income 
of  such  corporation,  but  also  the  $2,500,  the  50  per  cent  of  tiie  $5,000  deducted. 
That  is,  according  to  this  theory,  the  $5,000  whicli  must  be  deducted  from  a 
corporation's  gross  income  can  not  l)e  deducted  in  the  hands  of  other  corpora- 
tions wliicli  have  received  it  as  dividends  wlien  tlie  first  corporation  has  a  net 
income  of  $5,000  or  less,  but  it  can  be  deducted  if  such  corporation  has  a  net 
income  of  over  $5,000. 

No  sucli  result  was  intended  by  Congress,  and  T  am  clearly  of  the  opinion 
that  the  dividends  received  by  a  corj)oration  as  a  stockholder  of  any  other 
corporation  of  a  character  to  which  the  act  applies  should  be  deducted  from  its 
gross  iiKoine.  regardless  of  the  amount  of  the  net  income  of  such  dividend- 
paying   corporation. 

Respectfully 

George  W.  Wickebsham. 
The  Secretary  of  the  Treasury. 


Appendixes.  249i 


APPENDIX  EE. 

Department  of  Justice, 

February  14,  1910. 

SiB:  — I  have  the  honor  to  acknowledge  receipt  of  your  coramunications  of 
.January  22  and  February  4,  1910,  in  which  you  ask  ray  opinion  witli  reference 
to  whether  or  not  certain  business  concerns  fall  within  the  provisions  of  sec- 
tion 38  of  the  act  of  August  5,  1909  (36  Stat.  112)  which  provides  for  an 
excise  tax  "  with  respect  to  the  carrying  on  or  doing  business  "  by  cor[)()ra- 
tions,  joint  stock  companies  and  associations,"  and  in  my  reply  I  will  consider 
separately  the  several  classes  of  concerns  to  which  you  refer,  with  the  excep- 
tion of  certain  realty  associations  to  be  dealt  with  in  a  separate  opinion. 

1.  Partnership  associations,  organized  under  the  laws  of  the  State  of 
Pennsylvania. 

By  reference  to  the  Pennsylvania  statutes  I  find  that  the  material  provi- 
sions of  the  law  under  which  such  associations  are  organized  are  as  follows: 
The  association  is  formed  by  three  or  more  persons  subscribing  and  contrib- 
uting capital  thereto,  which  alone  shall  be  liable  for  the  debts  of  the  associa- 
tion, and  such  persons  sign  and  acknowledge  a  statement  in  writing  which 
contains  the  names  of  the  parties  composing  the  association,  the  amount  of 
capital  subscribed  by  each,  the  total  amount  of  capital,  and  when  and  how 
the  same  is  to  be  paid,  the  character  of  the  business  to  be  conducted  and 
location  of  the  same,  the  name  of  the  association  with  the  word  "  Limited  " 
added  as  a  part  thereof,  the  contemplated  duration  of  the  association  (which 
shall  not  in  any  case  exceed  twenty  years),  and  the  names  of  the  officers  of 
said  association  selected  in  conformity  with  the  provisions  of  the  act;  which 
statement  is  recorded  in  the  office  of  the  recorder  of  deeds  of  the  proper 
county. 

The  members  of  the  association  are  not  individually  liable  for  the  indebted- 
ness thereof  except  if  an  execution  is  issued  against  the  association  and  no 
property  can  be  found,  the  court,  after  investigation,  shall  order  the  issuance 
of  an  execution  against  the  members  of  the  association,  who  shall  be  liable  to 
the  extent  of  the  capital  subscribed  and  remaining  unpaid  by  them.  The  word 
"  limited  "  shall  constitute  the  last  word  of  the  name  of  the  association.  The 
interest  of  a  member  in  the  association  is  declared  to  be  personal  estate,  and 
it  may  be  transferred,  given,  bequeathed,  distributed,  sold  and  assigned,  under 
such  rules  and  regulations  as  the  association,  shall,  from  time  to  time,  pro- 
scribe by  a  majority  vote  of  its  members  in  number  and  value  of  their  in- 
terest, and,  in  the  absence  of  rules  and  regulations,  the  transferee  of  an  in 
terest  is  not  entitled  to  participate  in  the  business  of  the  association  unless 
elected  to  membership  by  a  vote  of  the  majority  of  the  members  in  number 
and  value  of  interest.  Any  change  of  ownership  which  occurs  in  the  absence 
of  rules  and  regtilations  governing  such  transfer,  and  which  is  not  followed 
by  election  to  membership,  entitles  the  transferee  only  to  the  value  of  the 
interest  so  acquired  at  the  time  of  acquiring  the  same,  at  a  price  and  terms 
to  ho  atrreed  upon,  and.  in  default  of  nprreenient.  at  a  price  and  terms  to  be 
determined  by  an  appraiser  to  be  appointed  by  the  Court  of  Common  Pleas. 


2l)0  Federal  Cokpokation  Tax  Law. 

One  meeting  ptr  annum  i>*  required  of  the  association,  and  it  is  also  re- 
quired that  there  shall  be  elected  not  less  than  three  nor  more  than  five  man 
agers,  who  shall  manage  the  affairs  of  the  association,  and  it  is  prohibited 
from  contracting  any  liability  except  by  one  or  more  of  the  managers.  The 
association  may  divide  the  profits  of  the  business  in  such  manner  and  amounts 
as  the  majority  of  its  managers  may  determine,  whicli  division  shall  not 
'■  diminish  or  impair  the  capital  stock  of  the  said  association."  It  is  pro- 
hibited from  loaning  its  credit,  name  or  capital  to  any  member  of  the  asso- 
ciation. It  may  be  dissolved  by  the  expiration  of  the  period  fixed  for  its 
duration,  or  by  a  majority  vote  of  its  members  in  number  and  value  of  in- 
terest, and  when  dissolved,  after  paying  its  liabilities,  the  remainder  of  its 
assets  shall  be  distributed  in  proportion  to  the  interests  of  the  members.  It 
is  authorized  to  adopt  and  use  a  common  seal;  and  contributions  to  the 
capital  may  be  made  in  real  or  personal  property,  at  a  valuation  to  be  ap- 
proved by  all  the  members.  All  real  estate  is  held  and  owned  in  the  name  of 
the  association,  and  it  must  "  sue  or  be  sued  "  in  the  association  name,  and 
when  suit  is  brought  against  any  such  association,  service  thereof  shall  be 
made  upon  the  chairman,  secretary  and  treasurer  thereof,  which  service  shall 
be  as  complete  and  effective  as  if  made  upon  each  and  every  member  of  such 
association ;  "  and  service  of  process  may  also  be  had  upon  any  agent,  chief, 
or  any  other  clerk  or  upon  any  director  or  manager  of  such  association  in  any 
county  where  the  association  may  maintain  or  keep  an  office  for  the  transac 
tion  of  business. 

The  excise  tax  created  by  section  38  of  the  act  of  August  5,  1909,  is  made 
to  apply  to  "  every  corporation,  joint  stock  company  or  association  organized 
for  profit  and  having  a  capital  stock  represented  by  shares  *  »  •  organized 
under  the  laws     *     *      *     of  any  State." 

1  have  no  doubt  that  an  association  organized  as  above  shown  falls  within 
the  provisions  of  this  act.  Its  organization  is  perfected  under  statutory 
authority,  and  while  it  is  denominated  a  partnership  association  yet  it  5s 
given,  as  a  sej)arate  entity,  every  privilege  and  power  that  is  essential  to  con- 
stitute an  incorporate  body.  In  fact  some  privileges  are  conferred  which 
might  have  been  omitted  and  still  it  would  fall  within  the  provisions  of  the 
act. 

A  similar  (piestion  arose  in  the  case  of  Liverpool  Insurance  Company  r. 
Massachusetts,  77  U.  S.  flfWi.  A  statute  of  the  State  of  Massachusetts  imposed 
a  tax  upon  "each  fire,  marine,  and  lire  and  marine  insurance  company  incor 
porat<'(l  or  associated  under  Ihc  laws  of  any  government  or  State  other  than 
one  of  the  United  States."  It  was  insisted  that  tliis  insurance  company  was 
not  a  corporation  or  association  within  the  meaning  of  the  statute.  It  ap 
jK'ared  frojii  an  analysis  of  its  articles  of  association  as  authorized  by  the 
Parliament  of  (Jreat  Uritaiii  that  (  I  )  it  liad  a  distinetive  and  artificial  name 
by  which  it  could  make  contract-*:  (2)  that  it  could  sue  and  be  siu'd  in  the 
name  of  one  of  its  officers,  and  the  whole  body  was  bound  by  the  judgment  : 
( :! )  tliat  it  li:i(l  a  priivisimi  U<r  |>criirt  iial  succession  by  transfer  and  trans 
iiiission  of  its  shares  of  eaj)ital  stock;  and  (1)  that  its  e\isfeii(<-  as  an  entitv. 
ajiart  fnmi  its  shareholders,  was  reco<.rni/.ed  by  the  act  of  Parliament,  wliich 
enabled  it  to  sue  its  shfireholders  and  be  sued  by  them.  On  tlie  other  hand, 
its  inilividniil  rvmbers  wic  Ii:ililc  fnr  the  debts  of  the  company,  and  it  could 
not   be  sued   in   its  artificial   name,  and   I  h<'   act  of    Parliannwit    iind<'r  which   it 


Appendixes.  251 

was  organized,  expressly  declared  that  such  organization  should  not  "  be  held 
to  constitute  the  body  of  a  corporation."  The  court  held  tliat  tlie  organiza- 
tion was  an  artificial  body  which  possessed  all  the  essential  elements  of  a 
corporation,  and  that  the  declaration  in  the  act  under  wliich  it  was  organized, 
that  it  should  not  be  so  considered,  cuuld  not  alter  the  fact,  and  therefore  held 
that  it  was  liable  to  the  tax  specified  in  the  Massacliusetts  8tatut<'. 

An  association  organized  under  the  Pennsylvania  statute  has  an  artificial 
name  in  whicli  all  of  its  business  is  transacted,  and  by  which  it  can  sue  and 
be  sued;  it  has  perpetual  succession  for  the  length  of  time  specified  in  the 
articles  of  association,  and  while  there  is  no  positive  provision  which  author- 
izes it  to  sue  and  be  sued  by  a  member  of  the  association,  yet  there  can  be  no 
doubt  that  any  member  of  the  association  is  at  liberty  to  make  a  separate  con- 
tract with  it  as  a  person,  and  that  an  action  thereon  could  be  maintained  by 
either  party,  and  that  a  right  of  action  of  any  other  kind  might  arise  and  be 
litigated  between  them.  In  addition  to  this,  a  member  of  the  association  is 
exempt  from  liability  for  its  indebtedness,  except  as  to  the  amount  of  capital 
subscribed  by  him. 

Such  an  association  clearly  falls  within  the  definition  of  a  corporation  given 
by  Mr.  Justice  Field  in  B.  &  P.  R.  R.  Co.  v.  Fifth  Baptist  Church,  108  U.  S. 
330,  to  wit: 

"  Private  corporations  are  but  associations  of  individuals  united  for  some 
common  purpose,  and  permitted  by  law  to  use  a  common  name  and  to  change 
its  members  without  a  dissolution  of  the  association." 

And  also  the  definition  given  by  the  Supreme  Court  of  New  York  in  People 
V.  Assessors  of  Watertown,  1  Hill,  (520,  which  was  quoted  with  approval  by  the 
Supreme  Court  of  Maine  in  Sibley  v.  Lumber  Association,  93  Me.  401  : 

"A  corporation  aggregate  is  a  collection  of  individuals  united  in  one  body 
under  such  a  grant  of  privileges  as  secures  the  succession  of  members  without 
changing  the  identity  of  the  body,  and  constitutes  the  members  for  the  time 
being  one  artificial  person,  or  legal  being,  capable  of  transacting  some  kind 
of  business  like  a  natural  person." 

And  within  the  definition  given  by  Chief  .Justice  Marshall  in  the  Dartmouth 
College  Case,  4  Wheat.  517,  636,  that 

"A  corporation  is  an  artificial  being,  invisible,  intangible,  and  existing 
only  in  contemplation  of  law." 

The  law  creating  this  tax  contains  no  special  requirements  as  to  what 
powers  this  artificial  person  shall  possess,  the  only  essentials  being  that  it 
shall  be  organized  under  a  law,  that  its  object  shall  be  for  profit,  and  that  it 
shall  have  a  capital  stock  represented  by  shares.  The  capital  of  these  asso- 
ciations is  subscribed  for  in  the  usual  way.  and  the  members  own  an  interest 
in  the  capital  stock  in  proportion  to  the  amount  subscribed  by  them. 

In  1  Cook  on  Corporations,  section  12,  it  is  said  that  a  share  of  stock  may 
b<>  defined  as  — 

"A  right  which  its  owner  has  in  the  management,  profits,  and  ultimate 
assents  of  the  corporation." 

The  interests  of  the  members  of  the  associations  in  question  certainly  falls 
within  this  definition.  It  is  true  that  the  issuance  of  certificates  of  shares 
is  not  required,  but  a  certificate  of  stock  is  but  a  mere  muniment  of  title,  a 
mere  evidence  of  ownership,  and  not  tlie  share  itself. 

"  It  operates  to  transfer   nothing  from  the  corporation  to  the  stockholder, 


252        Fedekal  Corporation  Tax  Law. 

but  merely  affords  to  the  latter  the  evidence  of  his  rights   ( 1  Cook  on  Corpo- 
rations, 13)." 

I  am  of  the  opinion,  therefore,  that  associations  organized  under  this  Penn- 
sylvania statute  are  liable  to  the  tax  imposed  under  section  38  of  the  act  of 
August  5,  1909. 

2.  Mutual  savings  banks  organized  under  an  act  for  the  incorporation  of 
savings  banks,  passed  by  the  legislature  of  West  Virginia  February  21,  1887, 
and  amended  by  the  act  of  February  24,  1899. 

Such  a  bank  may  be  organized  by  not  less  than  thirteen  persons,  citizens  of 
the  State,  whose  fitness  for  the  proposed  trust  is  certified  to  by  the  judge  or 
judges  of  the  Circuit  Court  of  the  county  wherein  the  proposed  savings  bank 
is  to  be  located.  The  form  of  the  charter,  and  the  method  of  procuring  the 
same  is  particularly  set  forth.  From  the  incorporators,  and  those  subsequently 
added  thereto,  fifteen  are  selected  by  the  body,  on  the  approval  of  the  judge 
or  judges  of  the  Circuit  Court  of  the  county,  who  constitute  a  board  of  trus- 
tees, and  who  have  power  to  act  for  the  corporation.  These  trustees  elect  from 
their  number  a  president  and  vice-president,  and  appoint  all  necessary  officers 
to  transact  the  business  of  the  bank.  The  bank,  when  organized,  is  authori/^ed 
to  receive  any  sum  of  money  for  deposit  and  to  invest  the  same  as  authorizefl 
by  the  act,  and  the  deposits,  with  dividends  accrued  thereon,  are  required  to 
be  paid  to  the  depositors  under  rules  and  regulations  to  be  adopted  by  the 
board  of  trustees.  By  section  24  it  is  provided  that  the  income  or  profit  of 
any  such  savings  bank,  after  the  deduction  of  all  reasonable  expenses  incurred 
in  the  management  thereof  and  the  guaranty  fund,  shall  be  divided  among  its 
depositors  or  their  legal  representatives,  at  such  times  as  may  be  fixed  by 
its  by  laws.  There  is  no  capital  subscribed  and  the  business  consists  in  re 
ceiving  deposits  and  investing  the  sum  so  received  in  accordance  with  the  pro- 
visions of  the  charter  and  the  by-laws  adopted  thereunder,  and  of  repaying 
the  depositors;  and  all  the  profits,  after  the  payment  of  the  necessary  expenses 
are  divided   among  the  depositors. 

There  is  no  question  that  such  a  concern  is  a  corporation;  but  it  is  a  cor- 
poration "  organized  for  profit  and  having  a  capital  stock  represented  by 
shares,"  as  is  required  by  the  statute.  In  a  certain  sense,  such  a  banking 
institution  is  organized  for  profit  —  that  is.  it  affords  a  reasonably  safe  meanR 
for  the  investment  of  one's  capital;  but  its  organization  and  the  transaction 
of  its  business  is  not  for  the  profit  of  those  who  constitute  its  managing  body, 
except  insofar  as  they  may  be  depositors.  But  the  more  serions  question  is, 
whether  such  an  instit)itinn  has  a  capital  stock  represented  by  shares.  Can 
the  depositors  who  place  their  money  temporarily  with  such  an  institution, 
having  no  right  whatever  to  participate  in  the  management,  be  regarded  as 
ahareholders,  and  the  respective  amounts  deposited  bo  considered  as  shares? 
I  think  an  answer  to  these  questions  may  be  found  in  the  following  authorities. 

The  case  of  Huntington  v.  Savings  Bank.  06  U.  S.  .188,  involved  an  institu- 
tion of  precisely  the  same  character.     The  suit  was  brought  by  an  adminis 
trator  of  a  deceased  trustee,  on  the  theory  that  he  was  entitled  to  a  pro  rata 
of  the  accumulated   profits.      In  discussing  the  natiire  of  the  corporation,  the 
Supreme  Court,  among  f>ther  thincrs,  sai<l : 

"  It  is  to  he  noticed  that  the  charter  does  not  aiithori/.e  the  creation  of  any 
corporate  stock  or  capital,  nor  does  it  contemplate  the  existence  of  anv  other 
than   the  deposits  which  may  be  made.     The  corporatorH  are  not  required   to 


Appendixi;«.  253 

contribute  anything.  They  are,  of  consequence,  no  shareholders.  Not  a  word 
is  said  in  the  instrument  respecting  any  dividends  of  capital,  or  even  of 
profits  to  others  than  the  depositors.  Certainly  no  express  authority  is  given 
to  make  dividends  to  the  corporators;  and  we  discover  nothing  from  which 
Kuch  authority  can  be  inferred." 

And  again, 

"  The  institution  having  no  capital  stock,  whatever  liability,  if  any,  there 
may  be  to  the  corporators,  must  be  satisfied  out  of  the  profits  made  from  the 
deposits." 

And  with  reference  to  the  object  of  the  corporation,  it  was  said: 

"  It  is  not  a  commercial  partnership,  nor  is  it  an  artificial  being  the  mem- 
bers of  which  have  property  interests  in  it,  nor  is  it  strictly  eleemosynary. 
Its  purpose  is  rather  to  furnish  a  safe  depositary  for  the  money  of  those 
members  of  the  community  disposed  to  intrust  their  property  to  its  keeping. 
It  is  somewhat  of  the  nature  of  such  corporations  as  church  wardens  for  the 
conservation  of  the  goods  of  a  parish,  the  college  of  surgeons  for  the  promo- 
tion of  medical  science,  or  the  society  of  antiquaries  for  the  advancement  of 
the  study  of  antiquities.  Its  purpose  is  a  public  advantage,  without  any 
interest  in   its  members." 

In  Hannon  v.  Williams,  34  N.  J.  Eq.  258,  the  court,  in  considering  the  nature 
of  a  savings  bank  of  this  character,  said: 

"  Savings  banks  difTer  widely  in  their  objects,  organization,  and  character 
from  ordinary  banks  and  other  joint  stock  companies.  They  have  no  capital 
stock.  They  are  incorporated  and  organized  not  for  the  advantage  of  the  cor- 
porators, but  solely  for  the  benefit  of  the  depositors.  Their  object,  as  stated 
in  some  of  the  early  charters  of  this  State  is  to  receive  and  safely  invest  the 
savings  of  mechanics,  laborers,  servants,  minors,  and  others,  thus  afTording 
to  euch  persons  the  advantages  of  security  and  interest  for  their  money,  and 
in  this  way  ameliorating  the  condition  of  the  poor  and  laboring  classes  by 
engendering  habits  of  industry  and  frugality. 

"  Properly  organized  and  conducted  a  savings  bank  is  a  quasi-charitable 
and  purely  benevolent  institution;  its  only  object,  the  safe  keeping  and  provi- 
dent investment  of  the  funds  of  the  depositors.  The  members  of  the  corpora- 
tion have  no  property  interests  in  its  funds,  of  which  they  are  by  law 
constituted  the  managers  and  guardians.  The  depositors,  who  alone  are 
beneficially  interested  in  the  prosperity  of  the  bank,  have  no  voice  in  its 
management,  nor  even  in  the  selection  of  the  persons  to  whom  its  management 
is  intrusted." 

In  Savings  Bank  v.  Town  of  New  London,  20  Conn.  Ill,  117,  the  Supreme 
Court  of  Connecticut,  in  speaking  of  the  nature  of  deposits  in  savings  banks, 
said: 

"  Deposits  are  not  stock,  within  the  most  enlarged  use  of  the  word ;  nor 
are  they  regulated  as  such,  but  are  more  like  deposits  in  other  banks,  drawing 
a  stipulated  interest.  They  are  money  put  into  the  hands  of  trustees,  to  be 
loaned  out;  and  whether  it  comes  to  the  trustees  from  one  man  or  many  men, 
makes  no  difference  in  view  of  the  law." 

Mr.  Justice  Field,  in  Bailey  v.  Clark,  88  U.  S.  286,  in  defining  the  capital 
of  a  corporation,  said : 

"When  used  with  respect  to  the  property  of  a  corporation  or  association. 
the  term  has  a  settled  meaning;    it  applies   only  to  the  property  or  means 


254        Federal  Corporation  Tax  Law. 

contributed  by  the  stockholders  as  the  fund  or  basis  for  the  business  or  enter- 
prise,  for   which    the  corporation   or   association   was   formed ;    and   the   court 
therefore  held  that  money  borrowed  from  time  to  time  by  a  banker  and  teni 
porarily  used  in  the  course  of  business  did  not  constitute  a  part  of  the  capital 
of  the  banks." 

I  have  been  unable  to  find  any  authority  in  wliich  it  has  been  held  that  a 
savings  bank,  organized  and  doing  business  as  is  provided  for  by  the  laws  of 
West  Virginia,  has  a  capital  stock  or  that  its  depositors  are  shareholders. 

In  tlie  case  of  Hannon  V.  Williams,  supra,  the  court,  in  arriving  at  the  con- 
clusion that  a  depositor  of  a  savings  bank  could  not  set  off  his  deposit  after 
the  bank  had  failed  against  a  liability  to  the  bank  created  by  a  loan,  likened 
a  depositor's  relationship  in  some  respects  to  that  of  a  stockholder  as  well  as 
a  creditor,  saying  that  in  prosperity  they  are  the  stockholders  among  whom 
the  profits  are  divided,  while  in  case  of  insolvency  they  are  the  creditors, 
among  whom  the  remaining  assets  are  to  be  distributed;  but  the  court,  as 
heretofore  shown,  held  that  such  an  institution  has  no  real  capital  stock,  and 
made  this  remark  only  by  way  of  argument  to  show  the  rights  of  depositors 
in  cases  of  the  character  there  under  consideration. 

From  the  language  of  the  act  creating  this  excise  tax,  and  the  nature  of 
these  savings  banks,  I  am  constrained  to  hold  that  they  are  not  subject  to  th« 
tax  imposed  by  section  38  of  the  act  of  August  5,  1909. 

I  hardly  need  add  that  this  conclusion  does  not  apply  to  so  called  Baving» 
banks  which  have  a  capital  stock  as  other  banking  institutions. 

Respectfully. 

Geobge  W.  Wickebsham. 
The  Secretary  of  the  Treasury. 


Appji^uixKs.  255 


APPENDIX  FF. 

Depabtment  of  Justice, 

February  21,  1910. 

SIR:  —  I  beg  to  acknowledge  receipt  of  your  communication  of  February  4, 
1910,  in  which  you  ask  my  opinion  whether,  in  ascertaining  the  net  income 
of  a  corporation  holding  and  dealing  in  real  estate  the  entire  interest  paid 
upon  items  of  indebtedness  secured  by  mortgages  on  such  real  estate  should 
be  deducted  from  the  gross  income,  without  reference  to  the  amount  of  capital 
stock  of  such  company. 

This  request  is  predicated  upon  a  communication  or  brief  presented  by  the 
"Allied  real  estate  interests  of  the  State  of  New  York,  and  of  allied  real  estate 
interests  of  the  City  of  New  York,"  signed  by  certain  attorneys  of  the  city  of 
New  Vork.  1  gather  from  the  communication  that  "  allied  real  estate  in- 
terests "  is  not  intended  as  the  designation  of  any  corporation  or  joint  stock 
company,  but  is  intended  to  suggevst  tl)at  the  incjuiries  propounded  in  this 
communication  are  of  common  interest  to  corporations  dealing  in  real  estate 
in  the  city  and  State  of  New  York,  and  therefore  a  comprehensive  ruling  is 
requested,  which  shall  be  applicable  to  all  cases  coming  within  the  general 
inquiry  put.  As  to  this,  I  might  content  myself  with  a  reference  to  the  posi- 
tion consistently  adopted  by  my  predecessors  that  opinions  should  not  be 
rendered  upon  merely  hypothetical  or  general  questions,  but  only  with  respect 
to  actual  cases  arising  in  the  administration  of  the  law  by  the  respective  de- 
partments. (99  Op.  82,  355,  421;  10  Op.  50;  13  Op.  531,  568:  19  Op.  331.) 
However,  in  view  of  the  cliaracter  of  the  statute  under  consideration  and  the 
great  importance  to  many  interests  affected  thereby,  and  to  the  fact  that  the 
inquiries  raised  by  this  communication  may  be  dealt  with  uiuler  two  general 
propositions,  I  deem  it  expedient  to  express  an  opinion  with  respect  thereto. 

The  so-called  Corporation  Tax  Law  (act  of  August  5,  1909,  section  38) 
imposes  a  special  excise  tax  upon  the  corporations,  joint  stock  companies  and 
associations  and  insurance  companies  therein  described,  to  be  measured  by  one 
per  centum  upon  the  net  income,  which  net  income  by  the  second  paragraph 
is  to  be  ascertained  by  deducting  from  the  gross  amount  of  such  income  re- 
ceived within  the  year  from  all  sources  certain  specified  items,  among  which 
only  the  two  following  are  necessary  to  be  considered  as  bearing  on  the  present 
inquiry,  viz. : 

"(First.)    All  the  ordinary  and  necessary  expenses  actually  paid  within  the 
year  out  of  income  in  the  maintenance  and  operation  of  its  business  and  prop 
erties,  including  all  charges  such  as  rentals  or  franchise  payments,  required 

to  be  made   as  a  condition  to  the  continued   use  or  possession  of  property 

*     •     * 

"(Third)    Interest  actually  paid  within  the  year  on  its  bonded  or  other  in 
debtedness  to  an  amount  of  such  bonded  and  other  indebtedness  not  exceeding 
the  paid-up  capital  stock  of  such  corporation,  joint  stock  company  or  asso 
eiation,  or  insurance  company  outstanding  at  the  close  of  the  year,  and  in  the 
ease  of  a  bank,  banking  association,  nr   trust  company,  all   interest  actually 
paid  by  it  within  the  year  on  deposits." 


256         Federal  Corporation  Tax  Law. 

It  is  manifest  that  with  respect  to  interest  on  "  its  "  bonded  or  other  in- 
debtedness, the  right  of  deduction  and  the  limitation  of  that  right  must  be 
found  in  the  third  paragraph  above  quoted,  and  that,  however  burdensome 
euch  limitation  may  appear  to  be  to  the  particular  companies  affected  thereby, 
it  is  nevertheless  very  clearly  expressed  by  the  act  of  Congress.  It  surely 
can  not  be  assumed  that  Congress,  having  specifically  set  a  limitation  to  the 
amount  of  interest  upon  the  indebtedness  of  a  corporation  which  may  be 
deductible  from  its  gross  income  in  reaching  the  measure  of  the  tax  under  thi* 
law.  left  the  way  open  in  the  first  clause  to  eliminate  the  limitation  imposed 
by  the  third,  so  that  if  in  any  of  the  cases  suggested  by  the  allied  real  estate 
interests,  the  indebtedness  secured  by  mortgage  upon  the  properties  acquired 
by  the  respective  corporations  shall  have  been  assumed  by  them,  and  has 
thereby  become  their  indebtedness,  interest  on  such  indebtedness  can  be  de- 
ducted only  to  an  amount  not  exceeding  the  interest  on  the  paid-up  capital 
stock  of  the  respective  corporation.  On  the  other  hand,  cases  are  suggeste<l 
in  the  communication  submitted  where  a  realty  corporation  takes  title  to  real 
property  subject  to  a  mortgage,  but  does  not  assume  the  indebtedness  secured 
tiiereby.  Under  such  circumstances,  as  is  stated  in  the  brief,  "  such  mortgage 
is  in  no  sense  its  indebtedness,  the  thing  itself,  i.  e.,  the  real  property  and  not 
the  corporation,  is  liable  for  the  mortgage  and  interest  thereon,  but  in  order 
that  the  corporation  may  maintain  or  keep  possession  of  or  not  be  ousted 
therefrom,  the  interest  must  be  paid." 

This  would  not  be  payment  by  the  corporation  owning  the  property  subject 

to  such  lien  of  its  own  indebtedness,  because  the  indebtedness  is  not  "  its  " 

bonded  or  other  indebtedness,  but  an  indebtedness  created  by   a   third  party 

and  charged  as  a  lien  upon  the  land  acquired,  subject  thereto,  by  the  purchas 

ing   corporation.     The    interest    accruing   upon    such    charge    or    incumbrance 

would  certainly  fall  within  the  description  in  the  first  clause  of  the  second 

paragraph  of  the  section  under  consideration  as  one  of  the  "  charges  require<i 

to  be  made  as  a  condition  to  the  continued  use  or  possession  of  property,"  and 

therefore  would  be  deductible  as  such. 

Respectfully, 

George  W.  Wickebsham. 

The  Secretary  of  the  Treasury. 


Appendixes.  257 


APPENDIX  GG. 

Department  of  Justice, 

March  9,  1910. 

Sib  :  —  I  have  the  honor  to  acknowledge  receipt  of  your  communication  of 
.January  28,  1910,  in  which  you  inquire  whether,  in  my  opinion,  foreign 
steamship  companies  engaged  in  the  business  of  ocean  transportation  of  pas- 
sengers, freight,  and  mails  in  ships  owned  by  them,  plying  between  America 
and  foreign  ports,  which  companies  maintain  agencies  in  this  country  where 
passenger  tickets  may  be  bought  and  freight  received  for  transportation  are 
corporations  subject  to  the  special  excise  tax  provided  by  the  act  of  August 
5,  1909  (36  Stat.  112). 

The  act  in  question  is,  by  its  provisions,  made  applicable  to  all  corporations 
organized  under  the  laws  of  any  foreign  country  which  receive  an  income  from 
business  transacted  and  capital  invested  within  the  United  States.  But  it  is 
first  insisted  upon  the  part  of  these  steamship  companies  that,  inasmuch  as 
the  receiving  and  discharging  of  cargoes  and  passengers  is  a  mere  incident  to 
the  principal  service  rendered  by  them,  which  consists  in  the  transportation 
of  their  cargoes  and  passengers  over  the  high  seas,  they  have  no  income  de- 
rived from  business  transacted  in  the  United  States. 

I  am  of  the  opinion  that  this  contention  cannot  be  maintained.  These  com- 
panies have  a  large  amount  of  capital  invested  in  wharves,  warehouses,  and 
other  facilities  essential  to  carrying  on  their  business  in  this  country.  Their 
business  consists  entirely  in  transporting  passengers  and  goods  and  merchan- 
dise between  ports  in  this  country  and  those  of  foreign  countries,  and  receiving 
and  discharging  the  same.  Through  agents  located  here  all  contracts  and 
arrangements  incident  to  such  a  business  at  this  end  of  their  lines  are  made, 
and  all  exports  are  delivered  to  their  warehouses  and  are  loaded  upon  their 
vessels,  and  the  passengers  embark,  while  they  are  within  the  limits  of  the 
United  States;  and  likewise  while  here  their  imports  are  unloaded  and  pas- 
sengers from  foreign  ports  disembark.  If  these  companies  do  not  transact 
business  in  the  United  States  they  transact  no  business  in  any  foreign  port, 
and  their  entire  business  is  carried  on  upon  the  high  seas.  To  such  a  con- 
clusion I  am  unable  to  give  assent. 

It  is  next  insisted  that,  inasmuch  as  they  are  engaged  in  the  transportation 
of  exports,  the  tax  in  question  is  a  tax  upon  exports,  and  that  tlie  legislation 
is  void  as  to  them  under  that  clause  of  section  9.  article  1.  of  the  Constitu- 
tion, which  provides  that  "  No  tax  or  duty  shall  be  laid  on  articles  exported 
from  any  State."     In  support  of  this  contention  the  following  cases  are  cited: 

Brown  v.  Maryland  (12  Wheat.  419),  wherein  the  Supreme  Court  had  under 
consideration  a  section  of  an  act  passed  by  the  legislature  of  Maryland,  which 
provided : 

"  That  all  importers  of  foreign  articles  or  commodities,  of  dry  goods,  wares, 
or  merchandise  by  bale  or  package,  or  of  wine,  rum,  whiskey,  and  other  dis- 
tilled spirituous  liquors,  etc.,  and  other  persons  selling  the  same  by  wholesale, 
bale,  or  package,  hogshead,  barrel,  or  tierce,  shall,  before  they  are  authorized 
Fed.  Coep.  Tax  —  17 


258        Federal  Corporation  Tax  Law. 

to  sell,  take  out  a  license  as  by  the  original  act  is  directed,  for  which  they 
shall  pay  fifty  dollars." 

The  court  held  that  this  section,  in  so  far  as  it  applied  to  importers,  was 
invalid,  because  it  was  in  effect  a  tax  levied  by  the  State  upon  imports,  which 
under  the  Constitution  was  prohibited. 

Almy  r.  California  (24  How.  169),  wherein  it  was  held  that  an  act  passed 
to  provide  revenue  from  a  stamp  tax  on  bills  of  lading  for  the  transportation 
from  any  point  or  place  in  that  State  to  any  point  or  place  without  the  StaU- 
of  gold  or  silver  coin,  gold  dust,  or  gold  or  silver  in  bars  or  other  form,  and 
which  required  that  such  stamp  be  attached  to  every  such  bill  of  lading  or 
stamp  thereon  was  invalid  because  it  was  the  imposition  of  a  tax  upon  exports. 
Fairbanks  r.  United  States  (181  U.  S.  283),  wherein  it  was  held  that  the 
stamp  tax  on  a  foreign  bill  of  lading  provided  for  by  the  act  of  June  13,  1898, 
was  equivalent  to  a  tax  on  the  articles  for  which  the  bills  were  given,  and  was 
violative  of  the  above  quoted  provision  of  the  Constitution. 

I  am  of  the  opinion  that  the  principles  decided  in  these  cases  are  not  ap- 
plicable to  the  statute  now  under  consideration.  The  tax  imposed  by  this  act 
is,  as  declared  therein,  a  "  special  excise  tax  with  respect  to  the  carrying  on 
or  doing  business"  by  the  corporation;  and  I  held  in  an  opinion  transmitted 
to  you  on  January  13,  1910,  that  it  is  not  a  tax  on  the  property  owned  by  the 
corporation,  or  on  the  income  from  such  property,  but  is  in  the  strict  and 
constitutional  sense  an  excise  tax;  and  that,  for  that  reason,  the  income  from 
the  interest  on  United  States  bonds  should  be  computed  in  the  gross  income 
of  a  corporation,  and  should  not  be  excluded  in  ascertaining  its  net  income. 
If  I  was  right  in  tliat  conclusion,  then  this  tax  is  not  imposed  upon  exports 
carried  by  these  steamship  companies,  or  even  upon  the  income  derived  from 
the  transportation  of  such  exports. 

But,  aside  from  this,  I  think  there  is  a  very  material  distinction  between 
the  present  act  and  those  involved  in  the  cases  above  cited.  The  passengers 
carried  by  these  companies  are  not  exports  within  the  meaning  of  this  clause 
of  the  Constitution.  (Crandali  v.  Nevada,  6  Wall.  35.)  And  Congress  has 
express  power  to  tax  imports.  Consequently  the  revenues  of  these  companies 
are  derived  from  different  clas.ses  of  business,  the  larger  portion  of  which  is 
subject  to  taxation.  The  act  does  not  undertake  in  its  terms  to  make  anv 
distinction  botwocn  the  ditrerent  kinds  of  business  in  which  these  or  any  other 
cnr|)(iriiti(iiis  cniliraced  tlierein  are  engaged,  but  the  tax  is  imposed  upon  them 
all  alike,  not  as  exporters  of  merchandise,  but  as  an  incident  to  their  entire 
business.     Such  were  not  the  facts  in  either  of  the  cases  cited. 

In  TJrown  r.  Maryland,  but  two  classes  of  persons  were  mentioned  in  tho 
act,  one  importers  of  the  articles  designated  and  the  other  wholesale  dealers 
in  those  articles;  and  und<T  its  provisions  an  importer  was  required  to  pay 
the  tax  before  a  sale  of  the  imported  articles  could  bo  made,  regardless  of  the 
fli/e  of  tlie  article  or  the  amount  sold.  Tlie  act  therefore  imjiosed  tlie  tax  upon 
the  importer  as  such,  he  bcin<;  subjected  thereto  solely  because  he  was  the 
recipient  for  hmIi  of  tli<'  inijxirtcd  urtieles.  A  careful  analysis  of  the  reasoning 
fif  tli<-  court  will  sliow  that  the  decision  was  rested  upon  this  fact.  In  support 
of  the  linlding  thnt  tlie  proliibition  to  tax  the  imported  articles  does  not  cea;4e 
the  moment    it  lands,   the  court  used   the  following   illustrations: 

"  The  United   States   have   the  ssime   right    to  tax   occupations   whidi    is    poB 


Appej^dixes.  259 

sessed  by  tln'  States.  Now,  suppose  the  United  States  should  require  every 
exporter  to  take  out  a  license,  for  which  he  would  pay  such  tax  as  Congress 
might  think  proper  to  impose,  would  the  Government  be  permitted  Ui  shield 
itself  from  the  just  censure  to  which  this  attempt  to  evade  the  prohibitions 
of  the  Constitution  would  expose  it  by  saying  that  this  was  a  tax  on  the 
person,  not  on  the  article,  and  that  the  legislature  had  a  right  to  tax  occu 
pations?  Or,  suppose  revenue  cutters  were  to  be  stationed  off  the  coast  for 
the  purpose  of  levying  a  duty  on  all  merchandise  found  in  vessels  which  were 
leaving  tlie  United  States  for  foreign  countries,  would  it  be  received  as  an 
excuse  for  this  outrage  were  the  Government  to  say  that  exportation  meant 
no  more  than  carrying  goods  out  of  the  country,  and  as  the  prohibition  to  lay 
a  tax  on  imports,  or  things  imported,  ceased  the  instant  they  were  brought 
into  the  country,  to  the  prohibition  to  tax  articles  exported  ceased  when  they 
were  carried  out  of  the  country?  "      (Page  444.) 

It  will  be  observed  that  the  first  illustration  deals  with  the  exporter  as 
such,  while  the  second  deals  directly  with  the  exported  article  while  In  trans- 
]H)rtation.  But  the  distinction  is  more  clearly  drawn  in  ans'"'ering  the  con- 
tention that  if  the  act  be  invalid,  then  an  importer  could,  without  being  sub- 
ject to  a  tax  imposed  by  the  State,  sell  his  goods  either  as  a  retailer  or  ped 
dler,  or  that  silver  plate  imported  for  his  own  use  would  not  be  subject  to 
taxation.     The  court  upon  this  subject  said: 

"  This  indictment  is  against  the  importer,  for  selling  a  package  of  dry 
goods,  in  the  form  in  which  it  was  imported,  without  a  license.  This  state  of 
things  is  changed  if  he  sells  them  or  otherwise  mixes  them  with  the  general 
property  of  the  State,  by  breaking  up  his  packages  and  traveling  with  them 
as  an  itinerant  peddler.  In  the  first  case  the  tax  intercepts  the  import  as 
an  import,  in  its  way  to  become  incorporated  with  the  general  mass  of  prop- 
erty, and  denies  it  the  privilege  of  becoming  so  incorporated  until  it  shall  have 
contributed  to  the  revenue  of  the  State.  It  denies  to  the  importer  the  right 
of  using  the  privilege  which  he  has  purchased  from  the  United  States  until 
he  shall  have  also  purchased  it  from  the  State.  In  the  last  cases  the  tax  finds 
the  article  already  incorporated  with  the  mass  of  property  by  the  act  of  thi* 
importer  He  has  used  the  privilege  he  had  purchased,  and  has  himself  mixed 
them  up  with  the  common  mass,  and  the  law  may  treat  them  as  it  finds  them. 
The  same  observations  apply  to  plate  or  other  furniture  used  by  the  importer. 
So,  if  he  sells  by  auction."      (Page  442.) 

Therefore,  the  same  article  in  the  hands  of  the  same  person  may  be  taxable 
or  not,  according  to  whether  it  still  retains  the  character  of  an  import. 

So,  in  the  other  cases  cited,  the  stamp  tax  was  attached  to  the  bill  of  lading, 
which  accompanied  the  exported  article,  and  was,  by  the  language  of  the  act5, 
made  applicable  to  exports  as  such. 

On  the  other  hand  in  Turpin  v.  Burgess  (117  U.  S.  504).  it  was  held  that 
a  stamp  required  to  be  fixed  to  every  package  of  tobacco  intended  for  cxporta 
tion,  before  its  removal  from  the  factory  was  constitutional,  because  the 
tobacco  had  not  become  an  article  of  export;  and  in  discussing  the  question. 
in  referring  to  the  two  clauses  of  the  Constitution  wherein  taxes  upon  export?, 
are  prohibited,  and  the  States  are  prohibited  from  imposing,  without  the  con- 
sent of  Congress,  taxes  upon  imports,  the  court  said: 

"  The  prohibition  in  both  cases  has  reference  to  the  imposition  of  duties  on 
goods  by  reason  or  because  of  their  export ition  or  intended  exportation,  or 


260         Federal  Corporation  Tax  Law. 

while  they  are  being  exported.  That  would  be  laying  a  tax  or  duty  on  export** 
or  on  articles  exported  within  the  meaning  of  the  Constitution,  but  a  general 
tax  laid  on  all  property  alike,  and  not  levied  on  goods  in  course  of  exportation, 
or  because  of  their  intended  exportation,  is  not  within  the  constitutional 
prohibition."     (Page  507.) 

And  in  Cornell  t.  Coyne  (192  U.  S.  418),  wherein  it  was  held  that  filled 
cheese  was  not  exempted  from  taxation  under  this  clause  of  the  Constitution 
because  manufactured  expressly  for  exportation,  the  court  quoted  with  ap- 
proval the  foregoing  language  of  the  court  in  Turpin  !".  Burgess. 

It  appears,  therefore,  that  the  validity  of  an  act,  under  this  clause  of  the 
Constitution,  which  taxes  an  article,  depends  not  upon  whether  it  will  increase 
the  price  of  the  article  when  exported,  but  whether  it  is  taxed  as  an  export. 
In  like  manner  and  for  the  same  reason  the  validity  of  a  tax  imposed  upon  a 
business  depends  not  upon  the  fact  that,  incidentally,  along  with  its  other 
business  the  concern  is  engaged  in  exporting  articles  or  carrying  exports,  and 
that  the  tax  may  thus  incidentally  increase  the  price  of  such  articles,  but 
whether  it  is  laid  upon  an  exporting  business  as  such.  If  it  were  otherwise, 
and  if  the  carrying  of  an  article  exempted  from  taxation  under  this  clause 
also  exempted  the  business  of  the  carrier,  then  no  tax  could  be  ini])osed  by 
either  the  United  States  or  any  State  upon  any  of  the  principal  railroad  com 
panies  in  the  country,  as  all  the  main  lines  are  daily  engaged  in  carrying 
commerce  which  has  been  consigned  from  foreign  ports  to  the  seaboard  for 
shipment,  and  while  being  so  carried  such  commerce,  if  not  being  technically 
exported,  is  certainly  "  in  the  way  of  exportation,"  as  suggested  in  Turpin  r. 
Burgess   (117  U.  S.  508). 

The  question  here  under  consideration  should  be  carefully  distinguished 
from  that  involved  in  the  numerous  cases  in  which  taxes,  either  direct  tr 
indirect,  imposed  by  States  have  been  held  unconstitutional  under  that  clause 
which  vesta  power  in  Congress  to  regulate  commerce  with  foreign  nations 
among  the  several  States  and  with  the  Indian  tribes.  According  to  numerous 
decisions  of  the  Supreme  Court  of  the  Ciiited  States,  this  clause  proliil)its  the 
States  from  interfering,  by  any  cluiracter  of  legislation,  witii  interstate  com 
merce,  and  hence  any  taxation  which  places  a  burden  upon  that  commerce 
and  interferes  therewith,  is  unlawful,  regardless  of  whether  it  be  a  tax  laid 
upon  the  transportation  of  the  subjects  of  Congress,  or  upon  tlie  receipts 
derived  from  tliat  transportation,  or  upon  the  occupation  or  business  of  carry- 
ing it  on.  This  is  not  true,  however,  as  to  the  clause  here  in  question.  For  n 
tax  to  be  violative  of  this  clause  it  iniisl  Ik-  imposed  upon  the  exported  article, 
and  the  courts  have  never  gone  further  than  to  hold  that  it  is  so  imposed, 
within  the  spirit  of  tliis  clause,  when  the  tax  may  be  directly  traceable  to  «uch 
article  as  an   export. 

ThcFi-  Mpf)earfl  another  reason  why  these  companies  cannot  escape  this  tax. 
In  Agiiirre  v.  Aloxweil  (.T  Blnteh.  lin)  it  was  insisted  that  a  tonnage  tax  upon 
a  foreitrn  vi'Hsel  was  contrary  to  tliis  jjrovision  of  the  Constitution;  but  the 
court  held  that : 

"  Ft  is  within  tlie  diHciction  of  Congress  to  lol.'illy  inhibit  the  import  or 
exf)ort  triifjc  in  fori'ign  vess<'ls  to  or  from  our  ports  or  to  grant  tlx-m  the 
privilc^rc  nf  lirinuing  in  or  carrying  out  cargoes  on  sueli  conditions  and  under 
HUrh  rf'iriilation^  ns  may  be  regarded  most  benefici.il  to  tlw  I'liitcil  Stiites." 

Ami    tin-    tonnage    tax    remains    to    tliis   day    on    our    statntv    Imoks,   tli<>    Ia-<t 


Appp:ndixes.  261 

enactment  being  section  36  of  the  act,  of  wliicli  the  law  under  consideration 
IB  section  38.  it  tlie  tax  upon  the  tonnage,  tliat  is,  the  carrying  capacity  of 
the  vessel,  is  not  a  tax  upon  the  merchandise  it  carries,  then  it  cannot  be  per- 
ceived how  a  tax  "  with  respect  to  the  carrying  on  or  doing  business  "  by  the 
owners  of  the  vessel  can  b<;  a  tax  on  such  nicrchandise.  Certainly  the  latter 
tax  is  further  removed  from  the  merchandise  than  the  former.  And  if  th? 
owner  of  the  foreign  vessel  can  be  made  to  pay  the  tonnage  tax  on  account 
of  the  nationality  of  the  vessel,  there  can  be  no  reason  why  he  cannot  be  made 
to  pay  a  tax  on  his  business,  when  such  business  consists  entirely  in  the  trans 
portation  of  passengers  and  merchandise  in  foreign  vessels. 

I  am  of  the  opinion,  therefor,  that  the  steamship  companies  in  question  are 
corporations   subject  to   the  excise   tax  created   by   section   38   of   the   act  of 

August  5,  1909. 

Respectfully, 

George  W.  WIckebsham. 
The  Secretary  of  the  Treasury. 


262        Federal  Corpokation  Tax  Law. 


APPEKDIX  HH. 

Department  of  Justice, 

March  31.  1910. 

Sir:  In  your  communication  of  February  4,  1910,  yon  ask  my  opinion  with 
reference  to  whether  certain  business  concerns  which  are  known  as  the  Snow 
Associates,  the  Department  Store  Trust,  the  Farlow  Real  Estate  Trust,  and  the 
Broomfield  Building  Trust  fall  within  the  provisions  of  section  38  of  the  act 
of  AufTust  5,  1909  (36  Stat.  112)  which  provides  for  an  excise  tax  with  respect 
to  the  carrying  on  or  doing  business  by  corporations,  joint  stock  companies 
and  associations;  and  in  reply  thereto  I  have  the  honor  to  say: 

All  of  these  companies  have  the  same  general  plan  of  organization  and  th^ 
Snow  Associates  will  be  taken  as  an  example. 

This  company  was  organized  under  and  by  an  agreement  and  declaration  of 
trust  which  contained  the  following  provisions:  The  purpose  of  the  tru^l 
was  the  improving  and  holding  of  four  parcels  of  real  estate  which  were  par 
ticularly  described,  and  the  title  thereto  was  vested  in  three  persons,  as  trus 
tees,  who  were  to  perform  their  duties  under  the  powers  granted  by  the  doclarn- 
tion  of  trust.  The  title  to  the  property  was  vested  exclusively  in  the  trustees, 
so  that  the  shareholders  were  without  interest  therein  other  than  that  con 
ferred  by  their  shares  issued  under  the  terms  of  the  trust,  and  have  no  riglit 
to  call  for  partition,  account  or  division  of  the  property,  rights  or  interests. 
The  capital  is  $1,224,000,  divided  into  shares  of  $100  each.  The  trustees  issued 
certificates  to  the  shareholders  for  the  number  of  shares  to  which  each  w:is 
entitled.  In  addition  to  the  shares,  amounting  to  $1,224,000,  the  trustees 
retained  in  their  hands  shares  of  the  par  value  of  $100,000  for  the  purpose  of 
raising  funds  to  improve  the  property  and  to  purchase  additional  real  estat<'. 
to  pay  for  mortgages,  etc.  At  meetings  of  the  shareholders  each  share  is 
entitled  to  one  vote.  Sliareholders  may  transfer  their  shares  on  surrender  of 
their  certificates  upon  books  to  be  kept  by  the  trustees,  in  the  manner  usual 
for  the  transfer  of  shares  of  stock  of  corporations,  or  in  such  other  manner 
as  the  trustees  may  prescribe.  The  death  of  a  shareholder  does  not  terminal*- 
the  trust  or  give  his  legal  representative  a  riglit  to  an  accounting  or  to  take 
any  action  in  the  courts  or  oth<'rwise  against  tlie  shareliolders,  but  <Mititles  tlx- 
h'gal  representative  of  the  deceased  to  receive  a  new  certificate  in  place  of  the 
certificate  held  by  the  decased.  No  assessments  can  be  made  iiiion  the  share- 
holders, and  th<'  insfrnriK-nt  contains  a  s<ij)ulation  tliat  they  are  i>xenipt  from 
personal  liability  on  account  of  contracts  entered  into  or  torts  conunitt«'d  by 
the  trustees.  Tli«'  shareholders  meet  annually,  and  they  have  also  special 
meetings  as  may  be  (nll'd  by  tlu-  trustees.  The  sliareholders  at  such  meetings 
fill  vacarifies  in  the  niinilicr  of  tnistecs  and  may  depose'  any  or  all  of  the 
trUHt('<'H  and  elect  others  in  their  jilace.  The  trustees  ar<'  empowered  to  exe 
cute  instruments  which  are  efinclnsive  iijum  (lie  associates.  The  trust  shall 
continue  for  twenty  yearn  after  (he  death  of  the  last  surviving  original  sub 
Hfrilx'r ;  [irovidr'd  (hat  a  riiaiori(y  in  iii(eres(  of  (he  (o(al  Tiniiiber  of  shares 
may  direct  a  sale  of  the  property  at  any  (inie,  and  upon  such  sale  and  distri- 


Appendixes.  263 

bution  among  the  shareholders  in  proportion  to  their  interest  tlie  trust  shall 
he  terminated.  The  trustees  are  vested  witli  full  power  of  leasing  and  letting, 
and  have  money  for  temporary  exigencies,  which  shall  bind  the  assets  of  the 
trust  but  not  the  shareholders  individually.  They  also  have  the  power  to 
mortgage  the  property  for  a  sum  not  exceeding  $100,000  for  the  purpose  of 
making  improvements  or  to  extinguish  liens;  and  they  determine  the  amount 
(if  net  income  and  declare  such  dividends  as  in  their  opinion  may  be  judicious, 
and  invest  in  such  manner  as  they  see  fit  any  moneys  which  they  may  hav<« 
on  hand. 

This  association  possesses  all  of  the  essential  elements  of  a  common-law 
joint  stock  company,  which  is  defined  to  be: 

"An  association  of  persons  for  the  purpose  of  business,  having  a  capital 
stock  divided  into  shares  and  governed  by  articles  of  association  which  pre- 
scribe its  objects,  organization  and  procedure  and  the  rights  and  liabilities  of 
the  niemlwrs,  except  that  the  articles  cannot  release  the  members  from  their 
liability  as  partners,  to  the  creditors  of  the  company;" 
and  is  otherwise  defined  as: 

"An  association  of  individuals  possessing  a  common  capital  divided  into 
shares  of  which  each  member  possesses  one  or  more.  These  shares  represent 
the  interests  of  the  members  and  are  transferable  by  the  owners  without  the 
consent  of  the  other  members,  or  the  creditors  of  the  association."  (2  Cook 
on  Corporations,  504.) 

In  Spotswood  V.  Mooris    (2  Idaho  360)    it  was  held  that  any  corporation, 
association  or  joint  stock  company  may  be  formed  by  individuals  for  the  pur 
chase  of  a  single  tract  of  real  estate,  the  title  to  which  may  be  taken  in  the 
trustee. 

There  can  be  no  doubt  that  this  concern  is  an  association  organized  for  profit 
and  having  a  capital  stock  represented  by  shares.  But  it  is  earnestly  insisted 
(in  behalf  of  these  companies  that  the  statutory  requirements  that  a  company, 
in  order  to  be  amenable  to  the  tax,  shall  be  "organized  under  the  laws  of  the 
Tnited  States  or  of  any  State  or  Territory  of  the  United  States,"  has  refer 
♦Mice  to  statutory  laws  which  prescribe  specifically  a  method  or  plan  of  organi- 
zation, and  which  confer  franchises  upon  the  body  when  organized ;  in  other 
words,  that  the  joint  stock  companies  and  associations  contemplated  by  the 
act  are  only  such  as  have  some  form  of  corporate  existence.  If  this  were 
tnie,  then  the  phrase  "  joint  stock  company  or  association  "  would  be  sur- 
jdusage,  but  I  am  not  willing  to  give  assent  to  such  a  construction. 

That  this  company  has  an  organization  goes  without  saying.  Its  trustees 
cimipose  a  board  of  managers,  upon  whom  rest  the  same  duties  as  those  im- 
posed upon  the  board  of  directors  of  a  corporation.  The  trustees  may  be 
discharged  and  their  successors  elected  in  the  same  way  or  in  a  way  similar 
to  that  by  which  the  directors  of  a  corporation  may  be  discharged  and  their 
successors  elected.  A  change  of  trustees  affects  the  business  of  the  concern 
no  more  than  the  change  of  directors  of  a  corporation.  Trustees  come  and  go. 
but  the  title  to  the  property  remains  with  those  having  charge  of  its  affairs, 
and  its  business  is  still  conducted  by  them  precisely  the  same  as  the  business 
affairs  of  a  corporation  continue  with  it  after  a  change  of  directors.  The  same 
ci'iiditioiis  exist  as  to  the  shareholders.  The  shares  are  transferable  by  as 
signment  in  like  manner  as  the  shares  of  a  corporation.  Such  assignment  has 
no  effect  whatever  on  the  business  of  the  company,  and  the  shareholders  possess 


264  Fbdekal  CoiiPORATiON  Tax  Law. 

only  the  rights  of  drawing  dividends  and  participating  indirectly  by  vote  in 
the  management  of  the  concern,  the  same  as  are  enjoyed  by  the  shareholders 
of  a  corporation.  Under  its  organization,  the  period  of  its  existence  is  fixed 
just  as  is  that  of  a  corporation  by  statute,  and  the  death  of  its  trustees  or 
shareholders  do  not  terminate  or  affect  its  existence  any  more  than  do  the 
death  of  the  directors  or  shareholders  of  a  corporation ;  and  in  the  period  fixed 
for  its  existence  by  the  articles  of  association  it  can  be  dissolved  only  by  vote 
of  its  shareholders,  which  power  is  likewise  possessed  by  the  shareholders  ot 
a  corporation.  It  is  true  that  its  shareholders  cannot  by  contract  free  them- 
selves from  personal  liability;  but  in  Liverpool  Insurance  Co.  r.  Massachu- 
setts (77  U.  S.  566,  575)  it  was  held  that  the  fact  that  the  shareholders  of  a 
joint  stock  company  organized  under  an  act  of  Parliament,  which  expressly 
declared  that  such  company  should  not  constitute  a  corporation,  were  indi 
vidually  liable  for  its  debts,  did  not  relieve  it  from  taxation  under  a  statute 
which  imposed  a  tax  upon  "each  fire,  marine  and  fire  and  marine  insurance 
company  incorporated  or  associated  under  the  laws  of  any  government  or 
State  other  than  one  of  the  United  States." 

In  short,  the  organization  of  this  company  is  just  as  compact,  and  in  fact, 
is  practically  the  same,  as  that  of  an  ordinary  corporation  organized  under 
a  general  or  special  statute. 

Nor  can  it  be  denied  that  its  organization  is  sanctioned  by  the  laws  of 
Massachusetts  and  that  it  obtains  its  vitality  from  those  laws,  just  as  much 
as  a  corporation  organized  under  a  special  act  of  the  legislature  of  that  State 
derives  its  vitality  from  such  act.  Such  an  association,  therefore,  is  based  on 
the  laws  of  Massachusetts,  and,  in  fact,  is  organized  thereunder. 

By  the  expression  "  laws  of  a  State,"  as  used  in  statutes,  reference  may  be 
had  to  the  common  law,  as  well  as  the  statutory  law  of  such  State   (Lycom 
ing  Fire  Insurance  Co.  v.  Medad  Wright  &  Son,  60  Vt.  515;  State  v.  Dyer,  67 

vt.  eno,  697 ) . 

I  am  of  tlie  opinion,  therefore,  that  these  various  business  organizations  are 

"joint  stock  companies  or  associations  organized  for  profit  and  having  a  cap 

ital  stock  represented  by  shares,"  organized  under  the  laws  of   the  state  of 

Massachusetts  within  the  meaning  of  the  excise  law  enacted  by  section  38  of 

the  act  of  August  5,    1909,  and  that  they   are  amenable   to  the   tax  created 

thereby. 

Respectfully, 

Geobge  W.  Wickebsham. 

The  Secretary  of  the  Treasury. 


Appendixes.  265 


APPENDIX  II. 

Department  of  Justice, 

April  2,  1910. 

SiB:  Your  letter  of  March  26,  1910,  was  received.  You  state  therein  that 
a  corporation,  which  was  engaged  in  business  on  August  5,  1909,  and  for  some 
time  thereafter,  but  prior  to  December  31,  1909,  became  legally  dissolved  in 
compliance  with  the  provisions  of  the  statutes  of  the  state  under  which  it  was 
organized,  contends  that  it  is  not  liable  for  the  excise  tax  created  by  section 
38  of  the  revenue  act  of  August  5,  1909,  and  you  ask  my  opinion  upon  the 
following  questions: 

First.  Whether  or  not  such  corporation  is  liable  for  the  excise  tax  created 
by  said  section  38  of  the  act  of  August  5,  1909. 

Second.  If  so  liable,  whether  a  lien  exists  on  the  assets  of  said  corporation 
to  secure  the  payment  of  said  tax,  and  incidentally  when  the  lien  attaches  to 
the  property  of  a  corporation,  joint  stock  company  or  association  liable  for 
taxes  under  said  act;  and 

Third.  If  no  such  lien  exists,  by  what  method  the  tax  can  be  collected  from 
such  corporation. 

In  answer  to  these  questions  I  will  say: 

1.  In  the  first  clause  of  section  38,  act  of  August  5,  1909,  it  is  pro- 
vided "  that  every  corporation  *  *  *  now  or  hereafter  organized  under 
the  laws  of  the  United  States,  or  of  any  State  *  *  ♦  shall  be  subject  to 
pay  annually  a  special  excise  tax  with  respect  to  the  carrying  on  or  doin» 
business  by  such  corporation  *  »  *  equivalent  to  7  per  centum  of  the 
entire  net  income  over  and  above  $5,000  received  by  it  from  all  sources  during 
such  year."  That  is,  the  tax  is  payable  annually,  and  it  is  imposed  "  with 
respect  to  the  carrying  on  or  doing  business  by  such  corporation."  and  the 
amount  of  tax  is  fixed  at  1  per  centum  upon  its  net  income  above  $5,000  re- 
eeived  during  such  year  —  that  is,  the  year  during  which  the  business  is 
transacted  with  reference  to  which  the  tax  is  imposed.  By  the  third  para 
graph  it  is  provided  that  the  income  of  the  corporation  shall  be  computed  for 
the  year  ending  December  31,  1909,  and  for  each  calendar  year  thereafter 
Therefore,  the  assessment  of  the  tax  is  always  for  the  year  preceding  its  col- 
lection and  not  for  the  year  within  which  the  collection  is  made,  and  the 
present  assessment  is  for  the  year  1909.  It  follows,  therefore,  that  any 
corporation  which  was  engaged  in  business  after  the  approval  of  the  act  on 
August  5,  1909,  is  amenable  to  this  tax. 

2.  It  will  be  observed  that  there  is  no  express  provision  in  this  act  which 
creates  a  lien  upon  the  property  of  the  corporation,  joint  stock  company  o»- 
association  to  secure  the  payment  of  the  tax.  However,  by  section  3180 
Revised  Statutes,  as  amended  by  the  act  of  March  1,  1879  (20  Stat.  331)  it  is 
provided  generally  with  reference  to  internal  revenue  taxes  that  "if  any  [)er 
son  liable  to  pay  any  tax  neglects  or  refuse-!  to  pav  the  same  after  demand, 
the  account  shall  be  a  lien  in  favor  of  the  United  States  from  the  time  whoa 


266         Federal  Corporation  Tax  Law, 

the  assessment  list  was  received  by  the  collector,  except  when  otherwise  pro- 
vided, until  paid,  with  the  interest,  penalties,  and  costs  that  may  accrue  in 
addition  thereto,  upon  all  property  and  rights  belonging  to  such  person;"  and 
in  the  eighth  paragraph  of  said  section  38,  act  of  August  5,  1909,  it  is  provided 
that  "  all  laws  relating  to  the  collection,  remission  and  refund  of  internal 
revenue  taxes,  so  far  as  applicable  to  and  not  inconsistent  with  the  provisions 
of  this  section,  are  hereby  extended  and  made  applicable  to  the  tax  imposed 
by  this  section."  The  method  of  assessing  the  tax  and  collecting  the  sam<>, 
as  provided  for  in  the  act  itself  and  in  the  general  statutes,  appears  to  be  as 
follows:  On  or  before  March  1  of  each  year  returns  are  required  tn  be  madi' 
by  the  corporations,  joint  stock  companies  and  associations  liable  for  the  tax 
to  the  collector  of  internal  revenue  of  the  district  in  which  they  have  their 
principal  place  of  business.  These  returns  are  forwarded  by  the  collector  to 
the  Commissioner  of  Internal  Revenue,  who  shall  make  the  assessment 
thereon.  By  section  3183  Revised  Statutes,  the  duty  of  collecting  all  taxes 
in  their  respective  districts  is  imposed  by  law  on  the  collectors  or  their  depu- 
ties, and  by  section  3184  it  is  provided  that  the  collector  shall  in  person,  or 
by  deputy,  within  ten  days  after  receiving  any  list  of  taxes  from  the  Commis 
sioner  of  Internal  Revenue,  give  notice  to  each  person  liable  to  pay  any  taxes 
stated  therein,  specifying  the  manner  in  which  such  notice  shall  be  given. 
And  in  the  fifth  paragraph  of  section  38  of  the  act  of  1909  it  is  provided  t'lp.t 
assessments  shall  be  made,  and  the  several  companies  liable  to  the  tax  shall 
be  notified  of  the  amount  for  wliich  they  are  liable  on  or  before  the  1st  day 
of  June  of  each  successive  year.  Therefore  it  is  the  duty  of  the  Commis- 
sioner of  Internal  Revenue  to  send  to  each  collector  a  list  of  the  companies 
liable  for  the  tax  in  his  district,  showing  the  amounts  for  which  they  are 
liable  within  such  time  that  the  collector  may  give  the  required  notice  to  such 
companies  on  or  before  the'  1st  day  of  June,  and  upon  such  lists  the  collec 
ti'ins  are  required  to  be  made.  These  are  the  only  lists  which  by  statute  are 
n'(]iiirfd  to  bo  sent  to  the  collectors;  and  under  the  provision  of  section  31  SB 
Revised  Statutes,  as  amended,  which  is  above  quoted,  tlie  lien  is  fixed  upon 
the  assets  of  the  corporation  when  this  list  comes  into  the  collectors'  hands. 
Therefore  if  the  corporation  in  (piostion  had  distributed  all  of  its  assets  and 
had  l)econie  dissolved  in  tli<'  manner  provided  for  by  law  ])ri()r  to  December 
31,  1909,  then  when  the  list  of  assessments  came  into  tlie  liands  of  the  collec 
tor  there  was  neither  corporation  nor  assets,  and  nothing  upon  which  the  lien 
could  attach,  and  consequently  no  lien  exists  to  secure  the  payment  of  the 
taxes. 

3.  Notwithstanding  the   fact   that   the   particular  method   of  collecting  this 
excise  tax  is  prescribed  in  the  statute,  yet  such  remedy  is  not  exclusive,  and 
the  government  may  resort  to  the  common-law  method  of  collecting  the  same. 
Such   was  the  holding.'  of  flic  Siipreinc  Court  of  tlic  United  States   in  Savings 
Rank  r.  The  Unit<>d   Stati-s    (19  Wall.  227,  240),  with  r<'ference  to  the  collec- 
tion of  a   tax   tmder  an   act  which  levied  a  tax   of  .'>   per  centum  on  all  divi- 
dends in  Hcrij)  or  money  decland  due  to  stockholders,  policyholders  or  deposi 
tors  as  |)art  of  the  earnings,  income  or  gains  of  any  bank,  trust  company,  sav 
ings   institution,   and   of   any    insurance  company.     The    dissolution   of   a    cor 
poration    df)eH    not   extinguish    its    liabilities;    and    through    courts   of   equity 
creditors  may    piirsne  its  assets   into   the   hamls   of  any   person  who   is  not  a 
bona   fide  purchaser.      (Mumma    r.   Potomac  Co.,   8   Pet.  281.  28(1;   Cjirran  v. 


Appendixes.  267 

Arkansas,    15   How.   304,   307;    Railroad    Co.   v.  Howard,   7    Wall.   392,   410; 
Scanimon  '.'.  Kimball,  92  T'.  fS.  ;Ut2.  367.) 

In  Railroad  Company  /•.  Howard  the  court  said: 

"A8H<'ts  derived  from  the  sale  of  the  capital  stock  of  the  corporation,  or  of 
its  property,  become,  as  respects  creditors,  the  substitutes  for  the  things  soM, 
and  as  such  they  are  subject  to  the  same  liabilities  and  restrictions  as  the 
things  sold  were  before  the  sale,  and  while  they  remained  in  the  possession  of 
the  corporation.  Even  the  sale  of  the  entire  capital  stock  of  the  company 
and  the  division  of  the  proceeds  of  the  sale  among  the  stockholders  will  not 
defeat  the  trust  nor  impair  the  remedy  of  the  creditors,  if  any  debts  remain 
unpaid,  as  the  creditors  in  that  event  may  pursue  the  consideration  of  the  sale 
in  the  hands  of  the  respective  stockholders  and  compel  each  one,  to  the  extent 
of  the  fund,  to  contribute  pro  rata  toward  the  payment  of  their  debts  out  of 
the  moneys  so  received  and  in  their  hands." 

H  the  corporation  in  question  engaged  in  business  after  the  approval  of  the 
act  of  August  5,  1909,  then  it  was  liable  for  the  tax,  though  it  may  not  have 
become  due  until  after  the  corporation  was  dissolved;  and  the  government  may 
collect  the  tax  by  pursuing  the  assets  of  the  corporation  into  the  hands  of  the 
stockholders,  in  the  same  manner  as  that  by  which  any  other  creditor  might 
obtain  satisfaction  of  his  debts. 

Respectfully, 
The  Secretary  of  the  Treasury.  Geobge  W.  Wickebshajh. 


268        Federal  Corporation  Tax  Law. 


APPENDIX  JJ. 

Form  of  Return  by  Insurance  Companies. 

Form  No.  634. 

To  bo  filled  in  by  Internal  Revenue 
To  be  filled  in  by  Collectors.  Bureau. 

List  No Assessment  List 19. .  . . 

Class Page   Line 

District  of Date  Received  19. . . . 

UNITED  STATES  INTERNAL  REVENUE. 

Return  of  Annual  Net  Income. 

(Section  38,  Act  of  Congress,  approved  August  5,  1909.) 

Insurance  Companies. 

Retu'rn  of  Net  Income  received  during  the  year  ending  December  31,  19. ., 

by ,  a  corporation,  the  principal  place  of 

business  of  which  is  located  in   ,  in  the  State  of 

1.  Total  amount  of  paid-up  stock  outstanding  at  close  of  year.     $ 

2.  Total  amount  of  bonded  or  other  indebtedness  outstanding  at 

close  of  year 

3.  Gross  Income  ( See  Note  A ) 

Deductions. 

4.  Total   amount  of   all   the   ordinary   and   necessary  expenses 

of  maintenance  and  operation  of  the  business  and   prop- 
erties of  the  corporation   ( See  Note  B) 

5.  (a)    Total  amount  of  losses  sustained  January 

1   to  December  31 $ 

(6)    Total  ii mount  of  depreciation  January  1  to 

December  31    

(c)  Total   amount  other   than   dividends   paid 

within  the  year  on   policy   and   annuity 

contracts 

(d)  Total  amount  of  net  addition  required  by 

law  to  be  made  within  the  year  to  re- 
serve fund    

Total   (See  Note  B) $. . 

6.  Total  amount  of  interest  January  1  to  Decem- 

ber 31  on  bonded  indebtedness  to  an 
amount  not  to  exceed  amount  of  paid-up 
cajiitnl  at  close  of  year   ( Se<'  Note  B)  .  .  .    $ 

7.  (")   Total  taxes  paid  January  1  In  nnctiilicr  31 

imposed  under  authority  of  the  Tnited 
States  or  any  State  or  Territory 
ther«'f)f.      

( h )    Foreiprn  taxes  paid 

Total  (See  Note  B) $. . 


Appendixes.  269 

8  Amount  received  by  way  of  dividends  upon  stock  of  other 
corporations,  joint  stock  companies,  associations  and  in- 
surance companies  subject  to  this  tax $ 

Total    Deductions    


9.  Net  Income  $ 

10.  Specific  deductions  from  net  income  allowed  by  law $5,000  00 


11.  Amount  on  which  tax  at  one  per  centum  is  to  be  calculated 

for  assessment $ . 


STATE  OF. 


County  of 


;,„ 


,  President,  and   ,  Treasurer,  of 

the   corporation,  whose  return  of  annual  net  income  i? 

set  forth  above,  being  severally  duly  sworn  each  for  himself,  deposes  and  says, 
that  the  foregoing  report  and  the  several  items  therein  set  forth  are,  to  his 
best  knowledge  and  belief  and  from  such  information  as  he  has  been  able  to 
obtain,  true  and  correct  in  each  and  every  particular;  that  the  amount  of 
gross  income  therein  set  forth  is  the  full  amount  of  gross  income,  without  any 
deductions  whatsoever,  received  from  all  sources  by  said  corporation  during 
the  year  stated,  and  that  the  net  income  therein  set  forth  is  the  full  amount 
on  which  the  tax  proper  is  to  be  assessed. 


President. 

f 

Treasurer. 

Sworn  and  subscribed  to  before  me  ) 
this  .  .  day  of ,  19 .  .       ) 

(Seal.) 

(Note  A.)  —  The  gross  income  shall  consist  of  the  total  of  the  gross  revenue 
derived  from  the  operation  and  management  of  its  business  and  properties, 
together  with  all  amounts  of  income,  including  dividends  on  stock  of  organi- 
zations to  this  special  excise  tax  from  other  sources  as  shown  by  the  entries 
on  its  books  from  January  1  to  December  31  of  the  year  for  which  the  return 
is  made. 

(Note  B.)  —  The  deductions  authorized  shall  include  all  expense  items 
under  the  various  heads  acknowledged  as  liabilities  by  the  corporation  making 
the  return  and  entered  on  its  books  from  January  1  to  December  31. 

(Note  C.)  —  This  form,  properly  filled  out  and  executed,  must  be  in  the 
hands  of  the  Collector  of  Internal  Revenue  for  the  district  in  which  is  located 
the  principal  office  of  the  corporation  making  the  return,  on  or  before  March  1, 


270 


Federal  Cokpobation  Tax  Law. 


APPENDIX  KZ. 

FOKM   OF   RETUBN   by  BANKS  AND  OtHEB  FINANCIAL  INSTITUTIONS. 

Form  No.  635. 


To  b«  filled  in  by  Collector. 

List  No 

Class 

District  of ...  . 


To  be  filled  in  by  Internal  Revenue 
Bureau. 

Assessment  List 19 ...  . 

Page  Line 

Date  Received 19. . . . 


UNITED  STATES  INTERNAL  REVENUE. 

Return  of  Annual  Net  Income. 

(Section  38,  Act  of  Congress,  approved  August  5,  1909.) 

Banks  and  Other  Financial  Institutions. 

Return  of  Net  Income  received  during  the  year  ending  December  31,  19. ., 

by ,  a  corporation,  the  principal  place  of 

business  of  which  is  located  at in  the  State  of 

1.  Total  amount  of  paid  up  stock  outstanding  at  close  of  year. 

2.  Total  amount  of  bonded  or  other  indebtedness  outstanding  at 

close  of  year 

3.  Gross  Income  ( See  Note  A ) 


$. 


Deductions. 

4.  Total   amount  of   all   the   ordinary   and   necessary  expenses 

of  maintenance  and  operation  of  the  business  and  prop- 
erties of  the  corporation   (See  Note  B) 

5.  (a)   Total  amount  of  losses  sustained  January 

1    to  December  31 $ 

(6)    Total  amount  of  depreciation  January  1  to 

December  31    

Total    (See  Note  B) $. 

6.  (a)    Total    amount    of    interest    January    1    to 

December  31  on  bonded  or  other  indebt- 
edness to  an  amount  not  to  exceed 
amount  of  paid  up  capital  at  close  of 
y<'ar    ( See  Note   B) 

(6)    Total  amount  f)f  interest  paid  within  the 

year  on  deposits 

Total $■ 

7.  («)    Total   (axes   paid   January   1    to   Dooember 

31,     imposed     under     aiitliority    of     the 

United     States  or  any  authority  thereof  $ 

(h)    Foreign  tnxes  paid 

Total    (See  Note  B) $ 


Appendixes.  271 


Amount  leeeived  by  way  of  dividends  upon 
stock  of  other  corporations,  joint  stock  com- 
panies, associations  and  insurance  companies 
subject  to  this   tax $ . 

Total  Deductions 


9.  Net  Income    $ 

10.  Specitic  deduction  from  not  income  allowed  by  law $5,000  00 

11.  Amount  on  wliich  ta.\  at  one  per  centum  is  to  be  calculated 

for  assessment    $ 


STATE  OF 

>      CO 

County  of ) 

,  President,  and   ,  Treasurer  of 

the   corporation,  whose  return  of  annual  net  income  it 

set  forth  above,  being  severally  duly  sworn,  each  for  himself  deposes  and  says, 
that  the  foregoing  report  and  the  several  items  therein  set  forth,  are  to  his 
best  knowledge  and  belief  and  from  such  information  as  he  has  been  able  to 
obtain,  true  and  correct  in  each  and  every  particular;  that  the  amount  of 
gross  income  therein  set  forth  is  the  full  amount  of  the  gross  income,  without 
any  deduction  whatsoever,  received  from  all  sources  by  the  said  corporation 
during  the  year  stated,  and  that  the  net  income  therein  set  forth  is  *Jie  full 
amount  on  which  tax  is  proper  to  be  assessed. 


President. 

Treasurer. 
Sworn  and  subscribed  to  before  me  ) 

this  . .  day  of ,  19. .        ) 

(Seal.) 

(Note  A.)  —  Gross  income  shall  consist  ol  the  total  amount  of  gross  revenue 
derived  from  the  operation  and  management  of  its  business  and  properties, 
together  with  all  amounts  of  income,  including  dividends  on  stock  of  other 
corporations,  joint  stock  companies  and  associations  subject  to  this  tax,  de- 
rived from  all  sources,  as  shown  by  the  entries  on  its  books  from  January  1 
to  December  31  of  the  year  for  which  return  is  made. 

(Note  B.)  —  The  deductions  authorized  shall  include  all  expense  items 
under  the  various  heads  acknowledged  as  liabilities  by  the  corporation  making 
the  return  and  entered  as  such  on  its  books  from  January  1  to  December  31. 

(Note  C.)  —  This  form,  properly  filled  out  and  executed,  must  be  in  the 
hands  of  the  Collector  of  Internal  Revenue  for  the  district  in  which  is  located 
the  principal  office  of  the  corporation  making  the  return,  on  or  before  March  1. 


272 


Fedeeux  Cokpoeation  Tax  Law. 


APPENDIX  LL. 

FoBM  OF  Retubn  by  Transpobtation  Corporations. 
Form  No.  636. 

To  be  filled  in  by  Internal  Revenus 
To  be  filled  in  by  Collector.  Bureau. 

List  No Assessment  List 19 ...  . 

Class Page Line 

District  of Date  Received  19 ... . 


UNITED  STATES  INTERNAL  REVENUE. 

Return  of  Annual  Net  Income. 

(Section  38.  Act  of  Congress,  approved  August  5,  1909.) 

Transportation  Corporations. 

Return  of  Net  Income  received  during  the  year  ending  December  31,  19. ., 

by   ,  a  corporation,  the  principal  place  of 

business  of  wliich  is  located  at ,  in  the  State  of 

1.  Total  amount  of  paid-up  stock  outstanding  at  close  of  year.      $ 

2.  Total  amount  of  bonded  or  other  indebtedness  outstanding 

at  close  of  year 

3.  Gross  Income   ( See  Note  A ) 

Deductions. 

4.  Total  amount  of  all  the  ordinary  and  necessary  expenses  of 

maintenance  and  operation  of  the   business   and   proper- 
ties of  the  corporation  (See  Note  B) 

6.    (a)   Total  amount  of  losses  sustained  January 

1  to  December  31 $ 

(6)    Total  amount  of  depreciation   January   1 

to   December  31 

Total    (See  Note  B) $ 

6.  Total    amount   of   interest   January    1    to   December   31    on 

bonded  indebtedness  to  an  amount  not  to  exceed  amount 

of  paid  up  capital  at  close  of  year   (See  Note  B) 

7.  (a)    Total   tax<'s  paid  January  1    to  December 

31,  imposed  under  autliority  of  the 
United  States  or  any  State  or  Territory 
thereof 

(b)    Foreign   taxes  paid 

Total   (See  Note  B) $ 

8.  Amount    received    by    way    "f    dividends    upon 

Ktork  of  «)th<T  corporal ioiiH,  joint   stock  corn- 
pan  icn,  asHociations  and  insurance  companies 

Hiibjcct  to  thiw  tax 

Total   «lcdiictionH   $ 


Appendixes.  273 

9.  Net  Income  $ 

Specific  deductions  from  net  income  allowed  by  law 5,000  00 


10.  Amount  on  which  tax  at  one  per  centum  is  to  be  calculated 

for  assessment   $ 

STATE  OF ) 

County  op j 

,  President,  and    ,  Treasurer  of 

the corporation,  whose  return  of  the  annual  net  income  is 

set  forth  above,  being  severally  duly  sworn,  each  for  himself  deposes  and  says, 
that  the  foregoing  report  and  the  several  items  therein  set  forth,  are  to  his 
best  knowledge  and  belief  and  from  such  information  as  he  has  been  able  to 
obtain,  true  and  correct  in  each  and  every  particular;  that  the  amount  of 
gross  income  therein  set  forth  is  the  full  amount  of  gross  income,  without 
any  deduction  whatsoever,  received  from  all  sources  by  the  said  corporation 
during  the  year  stated,  and  that  the  net  income  therein  set  forth  is  the  full 
amount  on  which  tax  is  proper  to  be  assessed. 


President. 

Treasurer. 
Sworn  and  subscribed  to  before  me 

this  .  .  day  of ,  19 . . 

(Seal.) 

(  Note  A. )  —  Gross  income  shall  consist  of  the  gross  revenue  derived  from 
the  operation  and  management  of  the  business  and  property  of  the  corpora- 
tion making  the  return,  together  with  all  amounts  of  income  (including 
dividends  received  on  stock  of  other  corporations,  joint-stock  companies  and 
associations  subject  to  this  tax)  derived  from  all  sources  as  shown  by  the 
entries  on  its  books  from  aJnuary  1  to  December  31  of  the  year  for  which  the 
return  is  made. 

(Note  B. )  —  The  deductions  authorized  shall  include  all  expense  items 
under  the  various  heads  acknowledged  as  liabilities  by  the  corporation  making 
the  return  and  entered  as  such  on  its  books  from  January  1  to  December  31 
of  the  year  for  which  the  return  is  made. 

(Note  C.)  —  This  form,  properly  filled  out  and  executed,  must  be  in  the 
hands  of  the  Collector  of  Internal  Revenue  for  the  district  in  which  is  located 
the  principal  office  of  the  corporation  making  the  return,  on  or  before  March  1. 


Fed.  Cobp.  Tax  — ■  i» 


21 -ii  IedjiKal  L  oiii'OKATioiv;    Iax  Law. 


APPENDIX  MM. 
Form  of  Return  by  Manufacturing  Corporations. 

(Form  No.   637.) 

To  be  filled  in  by  Internal  Revenue 
To  be  filled  in  by  Collectors.  Bureau. 

List  No Assessment  List 19 ...  . 

Class Page  Line 

District  of Date   Received    19 ...  . 

UNITED  STATES  INTERNAL  REVENUE. 

Return  of  Annual  Net  Income. 

(Section  .38,  Act  of  Congress,  approved  August  5,  1909.) 

Manufacturing  Corporations. 

Return  of  Net  Income  received  during  the  year  ending  December  31,  19.  ., 
by  .a  corporation,  the  principal  place  of 

business  of  which  is  located  at ,  in  the  State  of 

1.  Total  amount  of  paid  up  stock  outstanding  at  close  of  year.      $ 

2.  Total  amount  of  bonded  or  other   indebtedness  outstanding 

at  close  of  year 

3.  Gross  Income    ( See  Note  A ) 

Deductions. 

4.  Total   amount   of    all    the   ordinary   and    necessary   expenses 

of  maintenance  and  operation  of  the  business  and  prop- 
erties of  the  corporation   ( See  Note  B ) 

6.    (a)    Total  amount  of  losses  sustained  .January 

1    to    Dcccmljer   31 $ 

{h)    Total  amount  of  depreciation  January  1  to 

DccendHT  31    

Total    (See  Note  B) $ 

6.  Total  amount  of  interest  January  1   to  Decem- 

ber 31  on  bonded  or  other  indebtedness  to 
an  amount  nut  to  oxc<><m1  tin'  anio\int  of 
paid-up  capital  at  close  of  year  (See  Note 
B.)    

7.  (a)    Total   taxes   |)aicl   Jatiiiary    1    to  Deceml)er 

31,  imposed  uinlcr  aiittiority  of  llic 
I'liilcd  States  or  any  Stale  or  Territory 
thereof  

{b)    Foreign  taxes  paid 

Total    (S«>e  Note  B) $ 

8.  Amount    reeeived    by    wav    of    dividends    upon 

Htf'ck    of    oth<T    corporations,    joint    n\.o"\ 


Appendixes.  27/> 


companies,  associations,  and  insurance  com- 
panies subject  to  tliis  tax $ $. 


Total  Deductions $ 

9.  Net  Income $ 

10.  Specific  deduction  from  net  income  allowed  by  law 5,  000  00 


11.  Amount  on  which  tax  at  one  per  centum  is  to  be  calculated.     $ 

STATE  OF ) 

V  ss  ' 
County  of S 

President,  and    Treasurer  of 

the   corporation,  whose  return  of  annual  net  income  is 

set  forth  above,  being  severally  duly  sworn,  each  for  himself  deposes  and  says 
tliat  the  foregoing  report  and  the  several  items  therein  set  forth  are,  to  hi« 
best  knowledge  and  belief  an<l  from  sucli  information  as  he  has  been  able  to 
obtain,  true  and  correct  in  each  and  every  particular ;  that  the  amount  of 
gross  income  therein  set  forth  is  the  full  amount  of  gross  income,  without  any 
deduction  whatsoever,  received  from  all  sources  by  the  said  corporation  during 
the  year  stated,  and  that  the  net  income  therein  set  forth  is  the  full  amount 
on  which  the  tax  is  proper  to  be  assessed. 


President. 

Treasurer. 
Sworn  and  subscribed  to  before  me  ) 

this   .  .  .  day  of ,  19.  .       \ 

(Seal.) 

(Note  A.)  — The  gross  income  received  during  the  year  from  all  sources 
shall  in  the  case  of  a  manufacturing  corporation  consist  of  the  total  amount 
ascertained  through  an  accounting  that  shows  the  difference  between  the  price 
received  for  the  goods  as  sold  and  the  cost  of  such  goods  as  manufactured. 
The  cost  of  goods  manufactured  shall  be  ascertained  by  an  addition  of  a  charge 
to  the  ammount  of  the  cost  of  goods  as  manufactured  during  the  year,  of  the 
sum  of  the  inventory  at  the  beginning  of  the  year  and  a  credit  to  the  account 
•if  the  sum  of  the  inventory  at  the  end  of  the  year.  To  this  amount  should 
be  added  items  of  income  received  during  the  year  from  all  sources,  including 
dividends  received  on  stock  of  other  corporations,  joint  stock  companies  and 
associations  subject  to  this  tax.  In  the  determination  of  the  cost  of  goods 
manufactured  and  sold  as  above  such  credit  shall  comprehend  all  charges  for 
maintenance  and  operation  of  the  manufacturing  plant,  but  shall  not  embrace 
allowances  for  depreciation  or  losses,  which  items  shall  be  taken  account  of 
under  the  proper  heading  above  as  a  deduction. 

(Note  B.)  — The  deductions  authorized  shall  include  all  expense  items 
under  the  various  heads  acknowledged  as  liabilities  by  the  corporation.  Tuak- 
ing  the  return  and  entered  as  such  on  its  books  from  January  1  to  December 
.^1,  of  the  year  for  whicli  the  return  is  made. 

(Note  C.)  — This  form,  properly  filled  out  and  executed,  must  bo  in  th<^ 
hands  of  the  Collector  of  Internal  Revenue  for  the  District  in  which  is  locnted 
the  principal  office  of  the  corporation  making  the  return,  on  or  before 
March  1st, 


276        Federal  Coepokation  Tax  Law. 


APPENDIX  NN. 

FoBM  OF  Return  by  Mercantile  Corporations. 

Form  No.  639. 

To  be  filled  in  by  Internal  Revenue 
To  be  filled  in  by  Collectors.  Bureau. 

List  No Assessment  List 19.  .  .  . 

Class Page Line 

District  of Date  Received 19 .  . 

UNITED  STATES  INTERNAL  REVENUE. 
Return  of  Annual  Net  Income. 

(Section  38,  Act  of  Congress,  approved  August  5,   1909.) 
Mercantile  Corporations. 
(Corporations  whose  principal  business   is  buying  and  selling.) 
Rett'rn  of  Net  Income  received  during  the  year  ending  December  31,  19.  ., 

by   a  corporation,  the  principal  place  of 

business  of  which  is  located  at  in  the  State  of   

1.  Total  amount  of  paid-up  stock  outstanding  at  close  of  year.      $ 

2.  Total  amount  of  bonded  or  other  indebtedness  outstanding 

at  close  of  year 

3.  Gross  Income   ( See  Note  A ) 

Deductions. 

4.  Total  amount  of   all   the   ordinary   and   necessary   expenses 

of  maintenance  and  operation  of  tlie  business  and  prop- 
erties of  the  corporation   ( See  Note  B) 

5.  (a)    Total  amount  of  losses  sustained  January 

1    to    DoconiWr    31 $ 

(h)    Total  amount  of  (icjireciation  January  1  to 

December  31    

Total   (See  Note  B) $ 

6.  Total  amoiuit  of  interest  January  1   to  Decem- 

ber 31  on  bon(l<'d  or  other  indebtednes.s  to 
an  amount  not  to  exceed  the  amount  of 
paid-up  capital  at  close  of  year  (See  Note 
H.)   

7.  (a)    Total   (a.ve.s  paid   .Tanuary    1    to   Deeeml)er 

31,  imj)()He(l  under  autliority  of  the 
United  States  or  any  State  or  Territory 
tliereof 

(6)    Foreign  taxes  [)aid 

Total    (S^'e  Note  B) $ 

8.  Amount    reeeivod    by    way    of    dividendn    upon 

Btock     of     otlwr     corporations,     joint    stock 


Appendixes.  277 


companies,  associations,  and  insurance  com- 
panies subject  to  this  tax 


Total  Deductions $ 

9.  Net  Income $ 

10.  Specific  deduction  from  net  income  allowed  by  law .5,000  00 


11.  Amount  on  which  tax  at  one  per  centum  is  to  be  calculated 

for  assessment $ . 


STATE  OF ) 

(  ss. 


County  of 


President,  and   Treasurer  of 

the   corporation,  whose  return  of  annual  net  income  is 

t^pt  forth  above,  being  severally  duly  sworn,  each  for  himself  deposes  and  says, 
tliat  the  foregoing  report  and  the  several  items  therein  set  forth  are  to  the 
bfst  of  his  knowledge  and  belief,  and  from  such  information  as  he  has  been 
able  to  obtain,  true  and  correct  in  each  and  every  particular ;  that  the  amount 
of  gross  income  therein  set  forth  is  the  full  amount  of  gross  income  without 
any  deduction  whatsoever  received  from  all  sources  by  the  said  corporation 
during  the  year  stated,  and  that  the  net  income  therein  set  forth  is  the  full 
amount  on  which  the  tax  is  proper  to  be  assessed. 


President. 

Treasurer. 
Sworn  and  subscribed  to  before  me  ) 
this  .  .  .  day  of ,  19 . .       ) 

(Seal.) 

(Note  A.)  — The  gross  amount  of  income  received  during  the  year  from  all 
sources  shall  in  the  case  of  a  mercantile  corporation  consist  of  the  total 
amount  ascertained  through  inventory  or  its  equivalent,  which  shows  the 
difference  between  the  price  received  for  goods  sold,  and  the  cost  of  goods  pur- 
chased during  the  year,  with  an  addition  of  a  charge  to  the  account  of  the 
sum  of  the  inventory  at  the  beginning  of  the  year  and  a  credit  to  the  account 
of  the  sura  of  the  inventory  at  the  end  of  the  year.  To  this  amount  should 
be  added  all  items  of  income  received  during  the  year  from  other  sources, 
including  dividends  received  on  stock  of  other  corporations,  joint  stock  com- 
panies and  associations  subject  to  this  tax.  In  determining  this  amount  no 
account  shall  be  taken  of  allowances  for  depreciation  or  losses,  which  items 
shall  be  taken  accoimt  of  under  the  proper  heading  above  as  a  deduction. 

(Note  B.)  — The  deductions  authorized  shall  include  all  expense  items 
under  the  various  heads  acknowledged  as  liabilities  by  the  corporation  making 
the  return  and  entered  as  such  on  its  books  from  January  1  to  December  31 
of  the  year  for  which  the  return  is  made. 

(Note  C.)  — This  form  properly  filled  out  and  executed,  must  be  in  the 
hands  of  the  Collector  of  Internal  Revenue  for  the  district  in  which  is  located 
the  principal  office  of  the  corporation,  making  the  return  on  or  before  March  1. 


278        Federal  Cokpokation  Tax  Law. 


APPENDIX  00. 

Form  of  Return  by  Miscellaneous  Corporations. 
Form  No.  638. 

To  be  tilled  in  by  Internal  Revenue 
To  be  filled  in  by  Collectors.  Bureau. 

List  No Assessment  List 19 ... . 

Class Page Line 

District  of Date  Received  and  Filed 19. . 

UNITED  STATES  INTERNAL  REVENUE. 

Return  of  Annual  Net  Income. 

(Section  38,  Act  of  Congress,  approved  August  5,   1909.) 

Miscellaneous  Corporations. 

Return  of  Net  Income  received  during  the  year  ending  December  31,  19. ., 

by   a  corporation,  the  principal  place  of 

business  of  which  is  located  at  in  the  State  of   

1.  Total  amount  of  paid  up  .stock  outstanding  at  close  of  year.      $ 

2.  Total  amount  of  bonded  or  other  indebtedness  outstanding 

at  close  of  year 

3.  Gross  Income    ( See  Note  A ) 

Deductions. 

4.  Total  amount  of   all   the   ordinary  and   necessary   expenses 

of  maintenance  and  operation  of  the  business  and  prop- 
erties of  the  corporation    ( See  Note  B ) 

5.  (a)    Total   amount   of   loss  sustained   January 

1    to    IVccmlH'r    31 $ 

(6)    Total  amount  of  depreciation  January  1  to 

Deeeniber  31    

Total   ( See  Note  B) $ 

6.  Total  amount  of  interest  January  1  to  Decem- 

Iht  31  on  l)onded  indebtedn<'SH  to  an  amount 
nf)t  to  cxci'cd  amount  of  paid  uji  capital  at 
clo.se  of  year    ( See  Note  B. ) 

7.  («)   Total   tuxefl  paid   .fanuary    1    to  December 

31,     imposed     under    autliority    of    the 
United  State»  or  any  State  or  Territory 

thereof  

(6)    Foreign  taxes  paid 

Total    ( S<'e  Note   B) $ 

H.  Amount  reei'ived  by  way  of  dividends  upon 
stock  iif  (itlur  corfKJrations.  joint  stock 
(ompanies,  asKociatifms,  and  insurance  com- 
panies  sulijeot    in  this   tax '. 


T«)tnl   Dedurtions i  .'. 


Appendixes,  ^Id 

0.  Net  Income $ 

10.  Specific  deduction  from  net  income  allowed  by  law 5,000  00 


1 1 .  Amount  on  which  tax  at  one  per  centum  ie  to  be  calculated.     $ . 
STATE  OF 


(JOUNTY  OF ^  ..  ■• 

President,  and   Treasurer  of 

tiie   corporation,  whose  return  of  annual  net  income  is 

set  forth  above,  being  severally  duly  sworn,  each  for  himself  deposes  and  says 
that  the  foregoing  report  and  the  several  items  therein  set  forth,  are,  to  th»* 
best  of  his  knowledge  and  belief  and  from  such  information  as  he  has  been  able 
to  obtain,  true  and  correct  in  each  and  every  particular:  that  the  amount  of 
gross  income  therein  set  forth  is  the  full  amount  of  gross  income,  without  anv 
deduction  whatsoever  received  from  all  sources  by  the  said  corporation  during 
th«  year  stated,  and  that  the  net  income  therein  set  forth  is  the  full  amount 
on  which  tax  is  proper  to  be  assessed. 


President. 

Treasurer. 
Sworn  and  subscribed  to  before  me  ) 
this  .  .  .  day  of ,  19. .        \ 

(Seal.) 

(  Note  A. )  —  Gross  income  consists  of  the  total  of  the  gross  revenue  derived 
from  the  operation  and  management  of  its  business  and  properties,  together 
with  all  amounts  of  income  from  other  sources  including  dividends  on  stock 
of  other  organizations  subject  to  this  special  tax  received,  as  shown  by  entries 
upon  its  books  from  January  1  to  December  31.  of  the  year  for  which  return 
is  made. 

(Note  B.) — The  deductions  authorized  shall  include  all  expense  items 
under  the  various  heads  acknowledged  as  liabilities  by  the  corporation  making 
the  return  and  entered  as  such  on  its  books  from  January  1  to  Docemlx?r  31 
of  the  year  for  which  return  is  made. 

(Note  C.)  — This  form,  properly  filled  out  and  executed,  must  be  in  the 
hands  of  the  Collector  of  Internal  Revenue  for  the  District  in  which  is  located 
the  principal  office  of  the  corporation  making  the  return  on  or  before  MarcB"  1. 


280  Federal  Cobpokation  Tax  Law. 


APPENDIX  PP. 

Bill  of  Complaint  in  the  case  of  Stella  P.  Flint,  as  General  Guardian  of  the 
Property  of  Samuel  is.  Stone,  Jr.,  a  Minor,  Plaintilf,  v.  Stone  Tracy  Com- 
pany et  al.,  Defendants,  as  Filed  in  the  Circuit  Court  of  the  United  States 
for  the  District  of  Vermont  (No.  747,  October  Term,  1909,  in  the  Supreme 
Court  of  the  United  States). 
The  first  ten  paragraphs  of  the  Bill  of  Complaint,  in  the  first  of  what  are 
known   as  "  The   Federal  Corporation  Tax  Cases,"  merely  recite  the  circum- 
stances peculiar  to  the  case.     The  remaining  allegations  of  the  pleadings  ar? 
as  follows: 

"  Eleventh.  Your  orator  further  avers  that  the  provisions  of  the  tax  on 
corporations  provided  for  in  the  said  act  of  Congress  as  aforesaid  are  uncon- 
stitutional, null  and  void,  in  that  the  requiremcHt  to  make  and  file  the  said 
return  and  tliat  the  requirement  that  such  return  shall  become  a  matter  of 
public  record  and  the  requirement  to  pay  said  tax  are  burdens  and  taxes  upon 
the  said  charter  and  francliises  granted  as  aforesaid  by  the  State  of  Vermont 
and  on  the  right  and  power  of  the  State  of  Vermont  to  grant,  maintain,  and 
preserve  the  same  to  the  defendant  corporation,  and  are  a  burden  and  tax 
upon  a  prerogative,  power,  instrumentality,  and  function  of  sovereignty  be 
longing  to  the  State  of  Vermont  and  which  were  never  agreed  to  either  ex- 
pressly or  by  implication  by  the  State  of  Vermont  or  the  people  of  the  State 
of  Vermont  at  the  time  the  said  State  was  admitted  into  the  Union  or  before 
or  since  that  time. 

"  Twelfth.  Your  orator  furtlier  avers  that  the  said  provisions  of  the  Act 
of  Congress  aforesaid  are  unconstitutional,  null  and  void  and  in  violation  of 
the  Fifth  Amendment  of  the  Constitution  of  the  United  States  in  that  under 
said  provisions  of  law  the  def«'n(lant  corporalion  will  be  deprived  of  its  prop- 
erty witliout  due  process  of  law,  and  especially  in  tliis:  That  tlirougli  the 
publicity  of  its  business  the  privacy  of  its  affairs  will  be  largely  destroyed, 
that  its  chief  competitor,  the  said  firm  of  Dwight,  Tuxbury  &  Sons,  and  all 
other  persons,  will  l)e  able  to  gain  an  intimate  knowledge  of  what  have  hitherto 
been  private  affairs  of  tiie  defendant  corporation  and  its  trade  secrets,  wiiile 
no  corresponding  publicity  of  the  private  affairs  and  trade  secrets  of  the  said 
firm  of  Dwight,  Tuxbury  &  Sons  will  be  rcciuired  and  no  similar  invasion  of 
the  f)rivatc  affairs  or  tra(l<'  s<'erets  of  tlie  sjiii]  firm  of  Dwiglit.  Tuxbury  & 
Sons  will  l)e  permitted;  tiiat  the  said  assessment,  if  made,  will  be  laid  \ipon 
the  defendant  corporation,  and  not  upon  its  chief  competitor,  tlio  said  firm  of 
Dwight,  Tuxbury  &  Sons,  although  said  firm  is  carrying  on  the  same  char- 
acter of  business  next  door  to  the  place  of  Imsiiiess  of  the  defendant  corpora- 
tion, and  employing,  as  your  orator  is  iiifornicd  and  verily  lielievi-s,  apnroxi- 
mately  the  sanw;  amount  of  capital;  and  thai  liy  reason  of  fh<'  said  nnjnst 
.Tilv.iiitiip'  which  would  be  given  to  tlie  said  linn  of  Dwiglit,  Tuxl)ury  &,  Sons 
by  rornpliaiice  with  flic  said  provisions  of  flu-  said  Act  of  Congn-ss.  your  orator 
av^TH  that  i]u'  bnsirK'ss  of  flic  <lefeii<laiit  corporation  will  lie  forced  lo  siir 
render  to  the  Sfnt<'  of  Vcrinnnt  tlic  cliarfir  ami  franchise  graiifrd  as  afi>r"-aid 
and  which  it  now  owns  and  has  a  rigiit  to  enjoy  and  will  be  oliligol  to  diH|)oae 
of  its  aMHcts,  wind  u]>  its  afTairs  and  go  into  voluntary  dissolution. 


AppexXdixes.  281 

"'•Thirteenth.  Your  orator  further  avers  that  the  said  provisions  of  the  Act 
cif  Congress  aforesaid  are  unconstitutional,  null  and  void  and  in  violation  of 
the  Fiftli  Amendment  to  the  Constitution  of  tlie  United  States  in  that  under 
said  provisions  of  law  the  private  property  of  the  defendant  corporation  will 
be  taken  for  public  use  without  just  compensation  and  without  any  compen- 
sation whatever,  and  especially  in  this:  That  the  private  affairs,  books,  papers, 
records,  business  and  trade  secrets  of  the  defendant  corporation  and  the  con- 
tents of  its  books,  papers,  and  records  are  taken  for  publication  and  will  be 
given  to  the  Collector  of  Internal  Revenue  and  to  the  Commissioner  of  Internal 
Revenue  and  to  the  public  in  the  form  of  public  records. 

"  Fourteenth.  Your  orator  further  avers  that  the  said  provisions  of  the  Act 
of  Congress  aforesaid  are  unconstitutional,  null  and  void  and  in  violation  of 
the  Fifth  Amendment  to  the  Constitution  of  the  United  States  and  violate 
the  right  of  the  defendant  corporation  to  be  secure  in  its  papers,  effects,  books, 
records,  business,  private  affairs,  and  trade  secrets,  against  unreasonable 
searches  and  seizures  in  this:  That  by  said  provision  of  law  the  defendant 
corporation  will  be  obliged  to  disclose  to  its  chief  competitor,  the  said  firm  of 
Dwight,  Tuxbury  &  Sons,  and  also  to  the  Collector  of  Internal  Revenue  and  to 
the  Commissioner  of  Internal  Revenue,  and  to  the  public  its  papers,  effects, 
books,  records,  business,  private  affairs,  and  trade  secrets  and  the  contents  of 
its  papers,  books,  and  records  in  the  respects  hereinbefore  specified,  and  as 
specified  in  said  act. 

"  Fifteenth.  Y'our  orator  further  avers  that  the  said  provisions  of  the  Act 
of  Congress  aforesaid  are  unconstitutional,  null,  and  void,  and  in  violation 
of  the  Constitution  of  the  United  States,  in  that  the  depriving  of  the  de- 
fendant corporation  of  its  property  without  due  process  of  law  and  the  taking 
of  the  private  property  of  the  defendant  corporation  for  public  use  without 
just  compensation  and  the  violation  of  the  right  of  the  defendant  corporation 
to  be  secure  in  its  papers  and  effects  against  unreasonable  searches  and 
seizures  as  hereinbefore  set  forth  are  a  burden  upon  the  said  charter  and 
franchises  granted  as  aforesaid  by  the  State  of  Vermont  and  upon  the  right 
and  power  of  the  State  of  Vermont  to  grant,  maintain,  and  preserve  the  same 
to  the  defendant  corporation,  and  are  an  invasion  and  burden  upon  a  pre- 
rogative, power,  instrumentality,  and  function  of  sovereignty  belonging  to  the 
State  of  Vermont  and  which  were  never  agreed  to  either  expressly  or  by  im- 
plication by  the  State  of  Vermont  or  the  people  of  the  State  of  Vermont  at  the 
time  the  said  State  was  admitted  into  the  Union  or  before  or  since  that  time. 

"  Sixteenth.  Your  orator  further  avers  that  the  said  provisions  of  the  Act 
of  Congress  aforesaid  are  unconstitutional,  null,  and  void  and  in  violation  of 
the  Tenth  Amendment  to  the  Constitution  of  the  United  States  in  that  the 
requirements  of  said  provisions  are  a  burden  and  tax  upon  and  in  interference 
with  the  powers  of  the  State  of  Vermont  and  the  other  States  of  the  I^nion 
expressly  reserved  to  charter  and  incorporate  corporations  and  to  grant  char- 
ters and  franchises  to  such  corporations. 

"  Seventeenth.  Y'our  orator  further  avers  that  the  said  provisions  of  the  Act 
of  Congress  aforesaid  are  unconstitutional,  null,  and  void  and  in  violation  of 
the  Constitution  of  the  United  States  in  that  the  said  so  called  special  excise 
tax  with  respect  to  carrying  on  or  doing  business  is  not  in  reality  a  special 
eveise  tnx  with  respect  to  carrying  on  or  doing  business  by  the  dofendRnt  ror 
poration  or  by  any  corporation  or  joint  stock  company  or  association,  oxcept 


282        Fedekal  Corpokation  Tax  Law. 

insurance  companies,  but  is  iu  reality  a  direct  tav  upon  the  said  cliartor  md 
franchise  of  the  defendant  corporation  and  the  charters  and  franchises  3f  all 
other  corporations  within  the  provisions  of  said  act,  and  is  not  "pportioned 
among  the  several  States  according  to  their  population  as  required  by  tli" 
Constitution  of  the  L'nited  States. 

••  Eighteenth.  Your  orator  further  avers  tliat  if  the  said  tax  ^hall  be  '  eld 
nnt  to  be  a  direct  tax  upon  the  charter  and  franchise  of  the  defendant  corpo 
ration  and  u])nu  the  cliartcrs  •iiid  franchises  of  -ill  ither  corporations,  except 
insurance  companies  witliin  the  provisions  of  said  Act,  then  the  said  provi- 
sions are  unconstitutional,  null,  and  void  in  that  the  provisions  and  the  said 
tax  are  not  uniform  throughout  the  United  States  or  throughout  any  one  of 
tlie  Ignited  States  or  its  Territories  or  the  District  of  (\ilumbia  or  Alaska, 
and  your  orator  avers  that  such  provisions  and  the  said  tax  are  not  uniform 
within  the  class  or  in  respect  to  the  property  or  subjects  selected  for  taxation, 
except  insurance  companies,  and  that  the  said  provisions  and  tax,  while  stated 
to  embrace  and  afl'ect  and  be  levied  upon  the  carrying  on  and  doing  business 
in  realty,  touch  only  corporations  and  joint  stock  companies,  and  leave  free 
from  the  operation  of  said  provisions  and  tax  all  individuals  and  copartner- 
ships, firms,  although  carrying  on  and  doing  the  same  business  or  the  same 
kind  of  business  or  the  same  class  of  business  as  the  corporations  and  joint 
stock  companies.  And  your  orator  further  avers  that  in  many  other  respects 
the  said  provisions  and  the  said  tax  are  not  uniform  throughout  the  United 
States  and  that  the  said  provisions  and  tax  are  theretofore  unconstitutional, 
null,  and  void. 

"  Nineteentli.  Your  orator  further  shows  that  this  suit  is  not  a  collusive 
(me  to  confer  on  a  court  of  the  United  States  jurisdiction  of  a  case  of  which 
it  would  not  otherwise  have  cognizance,  and  that  she  has  duly  requested  the 
defendant  corporation  and  each  of  them  in  writing  to  omit  and  refuse  to 
prepare  and  lile  the  said  return  and  to  refrain  from  paying  the  said  tax  and 
to  contest  the  constitutionality  of  the  said  provisions  of  law  and  to  apply  ■ 
to  a  court  of  competent  jurisdiction  to  determine  the  liability  under  the  said 
|)rovisioMs,  and  that  a  copy  of  said  request  is  liereto  annexed  and  marked 
•■  Exliil)it  A"  and  made  a  part  of  tliis  bill  of  complaint  ;  l)ut  tiiat  the  di'fendaiit 
corporation  and  a  majority  of  its  directors  have  refused  and  still  refuse  and 
iiit<ii(l  omitting  to  comply  with  yojir  orator's  demand,  and  as  your  orator  is 
informed  and  verily  believes,  have  resolved  and  determined  and  intend  to 
(•()mi)lv  with  all  and  singular  the  said  provisions  of  the  said  Act  of  Congress 
and  to  make  and  file  the  return  aforesaid  with  the  Collector  of  Internal  Rev 
eniie  and  voluntarily  pay  the  said  assessment  if  any  is  inade.  A  copy  of  the 
rf'fu'ial  of  the  defendant  corpriration  and  a  majority  of  its  directors  is  Ix'rcby 
annexed  to  this  IJill  of  Conijilaiiit   and  marked  "  Inhibit   H." 

"Twentieth.  Your  orator  fortlier  shows  that  if  tli<'  said  return  is  made  and 
filed  it  will  result  as  liereiidx'fore  alleged,  in  great  and  im'parahle  iTijiiiy  to 
the  defendant  corporation  and  its  business,  and  to  your  orator  and  to  all 
otlier  stockholders  oi  the  defendatit  corpnraticm  and  will  involve  the  (lr'f<'ndant 
corporation  in  groat  and  irreparalile  damage,  all  t<i  the  irreparable  damage  of 
vour  orator  and  all  of  the  stockholders  of  the  defendant  corporation." 


Appendixes.  283 


APPENDIX  aa. 

EXTRACTS  FROM  UNITED  STATES  REVISED  STATUTES   RELATIVE 
TO  COLLECTION  OF   INTERNAL  REVENUE   TAXES. 

U.  S.  R.  S.  s«c.  16L  The  head  of  e<ich  department  is  authorized  to  prescribe 
regulations  not  inconsistent  with  law,  for  the  government  of  his  department, 
conduct  of  its  olfieers  and  clerks,  distribution  and  performance  of  its  business, 
and  tiie  cost,  use,  and  preservation  of  the  records,  papers  and  property 
appertaining  to  it. 

U.  S.  R.  S.  sec.  251.  The  Secretary  of  the  Treasury  shall  make  and  issue, 
from  time  to  time,  such  instructions  and  regulations  to  the  several  collectors, 
receivers,  depositaries,  officers,  and  others  who  may  receive  treasury  notes, 
United  States  notes  and  other  securities  of  the  Ignited  States,  or  who  may  bt> 
in  any  way  connected  or  employed  in  the  appropriation  and  issue  of  the  same, 
as  he  shall  deem  best  calculated  to  promote  the  public  convenience  and  security 
and  to  protect  the  United  States  as  well  as  individuals  from  fraud  and  loss, 
or  shall  prescribe  terms  of  interest,  oaths,  bonds  and  other  papers,  and  rules 
and  regulations  not  inconsistent  with  law,  to  be  used  under  and  in  the  execu 
tion  and  enforcement  of  the  various  provisions  of  the  Internal  Revenue  laws, 
or  in  carrying  out  the  provisions  of  law  relating  to  raising  revenue  from 
members,  or  to  duties  on  members  or  to  warehousing,  or  shall  give  such  direc- 
tions to  collectors  and  prescribe  such  rules  and  forms  to  be  observed  by  them 
as  may  be  necessary  for  the  proper  execution  of  the  law;  he  shall  prescribe 
the  forms  of  the  annual  statements  to  be  submitted  to  Congress  by  him,  show- 
ing the  actual  state  of  commerce  and  navigation  between  the  United  States 
and  foreign  countries  or  coastwise  and  between  the  collection  districts  of  the 
United  States  in  each  year. 

U.  S.  R.  S.  sec.  321.  The  Commissioner  of  Internal  Revenue  under  the  direc- 
tion of  the  Secretary  of  the  Treasury  shall  have  general  suj>printendence  of 
the  assessment  and  collection  of  all  duties  and  taxes  now  or  hereafter  imposed 
by  law,  providing  internal  revenue;  and  shall  prepare  and  distribute  all  the 
instructions,  regulations,  directions,  forms,  instruments  and  other  matters 
pertaining  to  the  collection  and  assessment  of  internal  revenue,  and  shall 
provide  hydrometers  and  proper  and  sufficient  adhesive  stamps  and  stamps  or 
dies,  for  expressing  and  denoting  stamp  duties,  or  in  the  case  of  personal 
duties,  the  amount  thereof,  and  alter  and  renew  or  replace  such  stamps  from 
time  to  time  as  occasion  may  require.  He  may  also  contract  for  or  produce  the 
printing  of  requested  forms,  decisions  and  regulations,  but  the  printing  of 
such  forms,  decisions  and  regulations  shall  be  done  at  the  Public  Printing 
Office,  unless  the  Public  Printer  shall  be  unable  to  perform  work;  Provided 
that  the  Commissioner  of  Internal  Revenue  may  under  such  regulntions  as 
may  be  established  by  the  Secretary  of  tiie  Treasury  after  due  public  notice, 
receive  bids  and  make  contracts  for  supplying  stationery,  blank  books  and 
blanks  to  the  collectors  in  the  several  collection  districts,  the  expenses  of 
assessing  and   the  expense  of  the  collection   of   internal   revenue. 


284         Federal  Corporation  Tax  Law. 

Sec.  3152.  The  Commissioner  of  Internal  Revenue  may  whenever  in  hiH 
judgment  the  necessities  of  the  service  so  require,  employ  competent  agents, 
not  exceeding  at  any  time  thirty-five  in  number,  to  be  paid  such  compensation 
as  he  may  deem  proper,  not  exceeding  in  aggregate  any  appropriation  made 
for  that  purpose;  and  he  may  at  his  discretion,  assign  any  such  agent  to  duty 
under  the  direction  of  any  officer  of  Internal  Revenue,  or  to  such  other  special 
duty  as  he  may  deem  necessary ;  and  no  general  or  special  agent  or  inspector, 
by  whatever  designation  he  may  be  known,  of  the  treasury  department  in 
connection  with  the  Internal  Revenue,  except  inspectors  of  tobacco,  snuff  and 
cigars,  and  e.xcept  as  provided  for  in  this  title,  shall  be  appointed,  commis- 
sioned, employed  or  continued  in  oHice.  The  agents  whose  employment  is 
authorized  by  this  section  shall  be  known  distinctly  as  internal  revenue  agents, 
and  they  shall  have  all  the  powers  of  entry  and  examination  conferred  upon 
any  officer  of  internal  revenue,  by  sections  3177,  3277,  3286,  and  3318  of  the 
Revised  Statutes  and  all  the  provisions  of  said  sections,  including  those  im- 
posing fines,  penalties,  forfeitures  or  other  punishments  for  the  enforcement 
thereof  are  hereby  made  applicable  to  the  action  of  internal  revenue  agents 
in  the  same  manner  as  if  such  agents  were  especially  named  in  each  of  said 
sections. 

U.  S.  R.  S.  sec.  3163.  Every  collector  within  his  collection  district  and  every 
internal  revenue  agent  shall  see  that  all  laws  and  regulations  relating  to  the 
collection  of  internal  taxes  are  faithfully  executed  and  complied  with ;  and 
shall  aid  in  the  prevention,  detection  and  punishment  of  any  frauds  in  rela- 
tion thereto.  It  shall  be  the  duty  of  every  collector  and  of  every  internal 
revenue  agent  to  report  to  the  Commissioner  in  writing  any  neglect  of  duty, 
incompetency,  delinquency  or  malfeasance  in  office  of  any  internal  revenue 
officer  of  which  he  may  obtain  knowledge,  with  a  statement  of  all  the  facts  in 
each  case  and  any  evidence  sustaining  the  same.  The  Commissioner  may 
transfer  any  inspector,  ganger  or  storekeeper,  or  storekeeper  and  gauger  from 
one  distillery  or  other  place  of  duty,  or  from  one  collection  district  to  another. 
Sec.  3164.  It  shall  b^,'  the  duty  of  every  collector  of  internal  revenue  to 
report  within  ten  days  to  the  District  Attorney  of  the  District  in  which  any 
fine,  penalty  or  forfeiture  may  be  incurred  for  the  violation  of  any  law  of  the 
United  States  relating  to  the  revenue,  a  statement  of  all  the  facts  and  cir- 
cumstances of  the  case  within  his  knowledge,  together  with  tlie  names  of  the 
witnesses  and  which  may  como  to  his  knowledge,  from  time  to  time,  stating 
the  provisions  of  the  law  believed  to  be  violated,  and  if  any  collector  shall, 
in  any  case  fail  to  report  to  the  proper  district  attorney  as  prescribed  in  this 
Hpction  his  right  to  any  compensation,  l)onefit  or  allowance  in  such  case  shall 
Ix-  forfeited  to  the  United  States,  and  the  same  may,  in  llu'  discretion  of  the 
Secretary  «f  the  Treasury  be  awarded  to  such  persona  as  may  make  complaint 
and  protM-cute  the  same  to    jndirnient  or  conviction. 

See.  310.'').  Every  collector,  deputy  collector  and  inspector  is  auiliori/^d  to 
administer  oaths,  and  to  take  evidence  touching  any  part  of  the  administra- 
tion of  tiif  internal  revenue  laws  with  wliich  lie  is  charged,  or  where  such 
oaths   and   evid<'nro  ar<'   iiutliori/cd    by   law.  or    regulation,   authorized    by   law, 

U}  Ik*  taken. 

Sec.  3172.   That  every  collector  shall,  from   tim<'  to   time,  cause  his  dcputicfl 
to  proceed  through  every  part  of  bin  district,  and  inquire  after  and  concern 
ing  all   pcrsonn  thenin   who   are   liable   tf)   pay  any    int4«rnal   revenue  and   nil 


Appendixes.  285 

persons  owning  or  having  the  care  and  management  of  any  objects  liable  to 
pay  any  tax,  and  to  make  a  list  if  such  persons  and  enumerate  such  objects. 
Sec.  3173.  That  it  shall  be  the  duty  of  any  person,  partnership  firm,  asso- 
ciation or  corporation  made  liable  to  any  duty,  special  tax,  stamp  or  tsm 
imposed  by  law,  when  not  otherwise  provided  for,  in  case  of  a  special  tax  on 
or  before  the  31st  day  of  July  in  each  year,  and  in  case  of  income  taxos,  on 
or  before  the  first  Monday  in  March  of  each  year,  and  in  other  cases  iK-fovo 
the  day  on  which  taxes  accrue,  to  make  a  list  or  return  verified  by  oath  ur 
affirmation,  to  the  collector  or  deputy  coTlector  of  the  district  where  locatc'l, 
of  the  articles  or  objects,  including  the  amount  of  annual  income,  charged  with 
a  duty  or  tax,  the  quantity  of  goods,  wares  and  merchandise,  made  or  sold 
and  charged  with  a  tax,  the  several  rates  and  aggregate  amount  according  to 
the  forms  and  regulations  to  be  prescribed  by  the  commissioner  of  internal 
revenue,  under  the  direction  of  the  Secretary  of  the  Treasury,  for  which  such 
person,  partnership,  firm,  association  or  corporation  is  liable;  provided,  that 
if  any  person  liable  to  pay  any  duty  or  tax  or  owning,  possessing  or  having 
the  care  or  management  of  property,  goods,  wares  and  merchandise,  articles 
or  objects  liable  to  any  duty,  tax  or  license,  shall  fail  to  make  and  exhibit 
a  list  or  return  required  by  law,  but  shall  consent  to  disclose  the  particulars 
of  any  and  all  the  property,  goods,  wares  and  merchandise,  articles  and  objects 
liable  to  pay  any  duty  or  tax,  or  any  business  or  occupation  liable  to  pay 
any  tax  aforesaid  then  and  in  that  case  it  shall  be  the  duty  of  the  collector 
or  deputy  collector  to  make  such  list  or  return,  which  being  distinctly  read, 
consented  to  and  signed  and  verified  by  oath  or  affirmation  by  the  person  so 
owning,  possessing  or  having  the  care  and  management  as  aforesaid,  may  be 
received  as  the  list  of  such  person;  Provided  further,  that  in  case  no  annual 
list  or  return  has  been  rendered  by  such  person  to  the  collector  or  deputy 
collector,  as  required  by  law  and  the  person  shall  be  absent  from  his  or  her 
residence  or  place  of  business  at  the  time  the  collector  or  deputy  collector 
shall  call  for  the  annual  list  or  return,  it  shall  be  the  duty  of  such  collector 
or  deputy  collector  to  leave  at  such  place  of  residence  or  business,  with  some 
one  of  suitable  age  and  discretion,  if  such  be  present,  otherwise  to  deposit  it 
in  the  nearest  post  office,  a  note  or  memorandum  addressed  to  such  person, 
requiring  him  or  her  to  render  to  such  collector  or  deputy  collector  the  list 
or  return  required  by  law  within  ten  days  from  the  date  of  such  note  or 
memorandum ;  verified  by  oath  or  affirmation.  And  if  any  person  on  being 
notified,  or  required  as  aforesaid,  or  whenever  any  person  who  is  required  to 
deliver  a  monthly  or  other  return  of  objects  subject  to  tax,  fails  to  do  so  at 
the  time  required,  or  delivers  and  return  which,  in  the  opinion  of  the  co'. 
lector,  is  false  or  fraudulent,  or  contains  any  undervaluation  or  understate- 
ment, it  shall  be  lawful  for  the  collector  to  summon  such  person  or  any  other 
person  having  possession,  custody  or  care  of  books  of  account,  containing 
entries  relating  to  the  business  of  such  person,  or  any  other  person  he  may 
deem  proper  to  appear  before  him  and  produce  such  books  at  a  time  and  place 
named  in  the  summons,  and  to  give  testimony  or  answer  interrogatories  under 
oath,  respecting  any  objects  liable  to  tax  or  the  returns  thereof.  The  collector 
may  summon  any  person  residing  or  found  within  the  state,  in  which  his  dis- 
trict lies;  and  when  the  person  intended  to  be  summoned  does  not  reside  nnd 
cannot  be  found  within  such  state,  he  may  enter  any  collection  district  wliore 
such  person  may  be  found,  and  there  make  the  examination  herein  authorized. 


286         Federal  Corpobation  Tax  Law. 

And  to  this  end  he  may  there  exercise  all  the  authority  which  he  might  law- 
fully exercise  in  the  district  for  which  he  was  Commissioner. 

Sec.  3174.  Such  summons  shall  in  all  cases  be  served  by  a  deputy  collector 
of  the  district  where  the  person  to  wliom  it  is  directed  may  be  found,  by  an 
attested  copy  delivered  to  such  person  in  hand,  or  left  at  his  last  and  usu.il 
place  of  abode,  allowing  such  person  one  day  for  each  twenty  live  miles  he 
may  be  required  to  travel,  computed  from  the  place  of  service  to  the  place  of 
examination ;  and  a  certificate  of  service  signed  by  such  deputy  shall  be  evi- 
dence of  the  facts  he  states  on  the  hearing  of  an  application  for  an  attach- 
ment. When  the  summons  requires  the  production  of  books,  it  shall  Im* 
sutlifient  if  sucli  books  are  described  with  reasonable  certainty. 

Sec.  3175.  Whenever  any  person  summoned  under  the  two  preceding  sections 
neglects  or  refuses  to  obey  such  summons,  or  to  give  testimony,  or  to  answer 
interrogatories,  as  required,  the  collectors  may  apply  to  the  judge  of  the  dis- 
trict court,  or  to  a  commissioner  of  the  circuit  court  of  the  United  States  for 
the  District  within  which  the  person  so  summoned  resides  for  an  attachment 
against  him  as  for  contempt.  It  shall  be  the  duty  of  the  judge  or  commis- 
sioner to  hear  the  application,  and  if  satisfactory  proof  is  made  to  issue  an 
attachment  directed  to  some  proper  officer  for  the  arrest  of  such  person,  and 
upon  his  being  brought  before  him  to  proceed  to  a  hearing  of  the  case  and 
upon  such  hearing  the  judge  or  commissioner  shall  have  power  to  make  such 
order  a.s  he  shall  deem  proj>er,  not  inconsistent  with  existing  laws  for  the 
punishment  of  contempts,  to  enforce  obedience  to  the  requirements  of  the 
summons,  and  to  punish  such  person  for  his  default  or  disobedience. 

Sec.  3176.  When  any  person,  corporation,  company  or  association  refuses 
or  neglects  to  render  any  return  or  list,  the  collector  or  any  deputy  collector 
shall  make,  according  to  the  best  knowledge  which  he  can  obtain,  including 
that  derived  from  the  evidence  elicited  by  examination  of  the  collector  and  on 
his  own  view  and  information,  such  list  or  return,  according  to  the  form  pre- 
.scribed  of  the  income,  property  and  objects  liable  to  taxation  owned  or  pos- 
sessed or  under  the  care  or  management  of  such  person,  or  corporation,  com- 
pany or  association,  and  the  Commissioner  of  Internal  Revenue  shall  assess 
all  taxes  not  paid  by  stamps,  including  the  amount,  if  any,  due  for  special 
tax,  income  or  other  tax.  and  in  cas<'  of  any  return  of  a  false  or  fraudulent 
list  or  valuation  intentionally,  he  shall  add  one  hundred  jht  centum  to  such 
tax;  and  in  case  of  a  refusal  or  neglect,  except  in  cases  of  sickness  or  absence, 
to  make  a  list  or  return,  or  to  verify  the  same  as  aforesaid,  he  shall  add  fifty 
per  cent  to  such  tax.  In  case  of  neglect  oc<'asiiin<'(l  by  sickness  or  .absenet>  i? 
aforesaid,  the  collector  may  allow  such  furtlier  time  fur  making  and  delivering 
stich  list  or  return  as  he  may  deem  necessary,  not  exceeding  thirty  days.  Tli- 
amount  so  added  to  the  tax  shall  in  all  cases  be  collected  at  the  .same  time 
and  in  the  same  manner  as  the  tax.  unless  the  neglect  or  falsity  is  discovered 
aft<T  the  tax  has  iK-en  paid,  in  which  ca.s<'  the  amount  so  added  shall  Ix'  col 
lected  in  the  same  manner  as  the  tax,  and  the  list  or  return  so  made  and  sjib 
scribed  by  sjich  collector  or  <lej)uty  collector  shall  be  held  priinn  fiicie  goo. I 
and   suflirient  for  all   lawful   iiurpos<'s. 

Sec.  ."5177.  Any  collector,  deputy  collector  or  inspector  may  enter  in  (lie  day 
time  any  buildings  or  place  where  any  articles  or  obj<'cls  subject  to  lax  are 
made,  pro.jiired  or  kept  within  his  district,  so  far  as  it  may  l)e  necessary  for 
the   purpose  of  examining  sai.l   artiel<-s  or  objects.     And   any   owner  of  such 


Ai'PJKJMDlXES.  2»Z 

building  ui-  place,  or  pfrs..n  having  the  agency  or  superinteudency  of  the  same, 
who  refuses  to  admit  such  olUcer,  or  to  suffer  him  to  examine  sue!)  article  or 
articles,  shall,  for  every  such  refusal,  forfeit  five  hundred  dollars.  And  when 
such  premises  are  open  at  night,  such  officers  may  enter  them  while  open  in 
tlie  performance  of  their  otiicial  duties.  And  if  any  person  shall  forcibly 
obstruct  or  liinder  any  collector,  deputy  collector  or  insjR'ctor  in  the  e.xecution 
of  any  power  and  authority  vested  in  him  by  law,  or  sliall  forcibly  rescue  or 
cause  to  be  rescued,  any  property,  articles  or  objects  after  the  same  shall  hav..- 
been  .seized  by  him,  or  shall  attempt  or  endeavor  so  to  do,  the  person  so 
ofTending,  except  in  cases  otherwise  provided  for  shall,  for  every  such  ofren.<5e, 
forfeit  and  pay  the  sura  of  five  hundred  dollars  or  double  the  value  of  the 
property  so  rescued,  or  be  imprisoned  for  a  term  not  exceeding  two  years  at 
the  discretion  of  the  court. 

Sec.  3178.  All  persons  required  to  make  returns  or  lists  of  objects  charged 
with  an  internal  tax  shall  declare  therein  wliether  the  several  rates  and 
amounts  are  stated  according  to  their  values  in  legal  tender  currency,  or  ac- 
cording to  their  values  in  coined  money,  and  in  case  of  neglect  or  refusal  so 
to  declare  to  the  satisfaction  of  the  collector  receiving  such  returns  or  list, 
.such  officer  shall  make  returns  or  lists  for  sucli  persons  so  neglecting  or  re- 
fusing, as  in  cases  of  persons  neglecting  or  refusing  to  make  the  returns  or 
lists  required  by  law.  and  the  Commissioner  shall  as.sess  the  tax  thereon,  and 
add  tliereto  the  amount  imposed  by  law  in  ca.ses  of  such  neglect  or  refusal. 
And  whenever  the  rates  and  amounts  contained  in  tlie  returns  or  lists  an; 
stated  in  coined  money,  the  collector  receiving  the  same  sliall  reduce  them  to 
their  equivalent  in  legal  tender  currency,  according  to  the  value  of  .such 
coined  money  in  such  currency  for  the  time  covered  by  such  returns. 

8ec.  3179.  Whenever  any  person  delivers  or  discloses  to  the  collector  or 
deputy  any  false  or  fraudulent  list,  return,  account  or  statement  with  intent 
to  defeat  or  evade  the  valuation,  enumeration  or  assessment  intended  to  be 
made,  or  being  duly  summoned  to  appear  to  testify,  or  to  appear  and  produce 
such  books  as  aforesaid,  neglects  to  appear  or  to  produce  said  books,  he  shall 
be  fined  not  exceeding  one  thousand  dollars,  or  Ix-  imprisoned  not  exceeding 
one  year,  or  both,  at  the  discretion  of  the  court  with  costs  of  prosecution. 

Sec.  3180.  Whenever  there  are  in  any  district  any  articles  not  owned  or 
p<)s.sessed  by  or  under  the  care  or  control  of  any  person  within  said  district 
and  liable  to  be  taxed,  and  of  which  no  list  has  been  transmitted  to  the  col- 
lector, as  required  by  law,  the  collector  or  one  of  his  deputies  shall  enter  tha 
premises  where  such  articles  are  situated,  and  shall  take  such  view  thereof 
as  may  he  necessary  and  make  lists  of  the  same,  according  to  the  form  i)r<'- 
scribed.  Said  lists  to  be  subscribed  by  such  collector  or  deputy  collector  and 
shall  be  taken  as  sufficient  lists  of  such  articles  for  all  purposes. 

Sec.  3182.  The  Commissioner  of  Internal  Revenue  is  hereby  authorized  and 
required  to  make  the  inquiries,  determinations  and  assessments  of  all  taxes 
and  penalties  imposed  by  this  title,  or  accruing  under  any  former  internal 
revenue  act  where  such  ta.xes  have  not  been  duly  paid  by  stamp  at  the  time 
and  in  the  manner  provided  by  law,  and  shall  certify  a  list  of  such  assess- 
ments when  made  to  the  proper  collectors  respectively,  who  shall  proceed  to 
collect  and  account  for  the  taxes  and  penalties  wo  certified.  Whenever  it  is 
ascertained   that  any   list  which    has  b«H'n,  or  shall  be.  delivered   to   anv  col- 


288        Federal  Cobpoeation  Tax  Law. 

lector  is  imperfect  oi  incomplete,  in  cousequence  of  tiie  omission  of  the  name 
of  any  person  liable  lo  tax,  or  in  consequence  of  any  omission  or  understate- 
ment or  undervaluation,  or  false  or  fraudulent  statement  coniained  in  any 
return  made  by  any  person  liable  to  tax,  the  Commissioner  of  Internal  Rev- 
enue may  at  any  time  within  fifteen  months  from  the  time  of  the  delivery  of 
the  list  to  the  collector  as  aforesaid,  enter  on  any  monthly  or  special  list  the 
name  of  such  person  so  omitted,  together  with  the  amount  of  tax  for  which 
he  may  have  been  or  shall  become  liable,  and  also  the  name  of  any  such  person 
in  respect  to  whose  return  as  aforesaid  there  has  been  or  shall  be  any  omis 
sion,  undervaluation  and  understatement  or  false  or  fraudulent  statement, 
together  with  the  amount  for  which  such  person  may  be  liable  above  the 
amount  for  which  he  may  have  been  or  shall  be  assessed  upon  any  'eturn 
made  as  aforesaid,  and  he  shall  certify  and  return  such  list  to  the  collector 
as  required  by  law,  and  all  provisions  of  law  for  the  ascertainment  or  lia- 
bility of  any  tax,  or  the  assessment  or  collection  thereof  shall  be  held  to  apply 
so  far  as  may  be  necessary  to  the  proceedings  herein  authorized  and  directed. 

Sec.  3183.  It  shall  be  the  duty  of  the  collectors  or  their  deputies  in  their 
respective  districts,  and  they  are  authorized  to  collect  all  tlie  taxes  imposed 
by  law,  however  the  same  may  be  designated.  And  every  collector  and  deputy 
collector  shall  give  receipts  for  all  sums  collected  by  him,  excepting  wlien  the 
same  are  in  payment  for  stamps  sold  and  delivered ;  but  any  collector  oi 
deputy  collector  shall  issue  a  receipt  in  lieu  of  stamp  representing  a  tax. 

Sec.  3184.  Wliere  it  is  not  otherwise  provided,  the  collector  sliall  in  penson 
or  by  deputy,  witliin  ton  days  after  receiving  any  list  of  taxes  from  tlie  Coni- 
missioner  of  Internal  Revenue,  give  notice  to  each  person  in  writing  to  pay 
any  tax  stated  therein  to  be  left  at  his  dwelling  or  usual  place  of  business,  or 
to  be  sent  by  mail,  stating  the  amount  of  such  tax  and  demanding  paymciit 
thereof.  If  such  jhtsoh  does  not  pay  the  tax  witliin  ten  days  after  the  service 
or  the  sending  by  mail  of  sucii  notice,  it  shall  be  tlie  duty  of  the  collect^/ 
or  his  deputy  to  collect  the  said  taxes,  and  the  penalty  of  five  per  centum 
additional  upon  the  amount  of  taxes,  and  interest  at  the  rate  of  one  pei- 
centum  a  month. 

Sec.  31SG.  If  any  person  liable  to  pay  any  tax  neglects  or  refuses  to  pay 
tlie  same  after  demand,  the  amount  sliall  be  a  lien  in  favor  of  the  I'nited 
States  from  tlie  tinu-  wln-n  the  assessment  list  was  received  by  the  collector, 
except  when  otherwise  provided,  until  paid  with  the  interest,  penalties  and 
costs  that  may  accrue  in  addition  thereto  upon  tlie  property  and  rights  to 
property  belonging  to  sucli  person. 

Sec.  3187.  If  any  person  li;ilili'  to  pay  any  taxes  neglects  or  refuses  to  pay 
the  same  within  (en  days  aft<'r  notice  and  deniand,  it  sliall  Iw  lawful  for  the 
collr-ctor  or  his  (lci)iity  to  collect  the  said  (a\,  with  live  per  eeiitiiiii  additional 
tluTeto  anil  iiit<'reHt  as  .ifori'said  by  distraint  niid  salr  in  tlu'  manner  herein 
provided,  of  tlie  goods,  di.-it Ids  or  otln-r  I'lTerts,  iiiilinling  stocks,  securitifiB 
and  evidences  of  debt  of  the  person  (IcliiKpwnt  as  aforesaid;  Provided  th.it 
ihi-re  be  exempted  from  distraint  and  sale  if  belonging  to  the  iiead  of  a  family 
prhofd  books  and  wearing  npparrl  ni'ci'ssary  for  said  family:  also  arnm  for 
perHon.il  iisi'.  oim'  cow.  two  hogs,  live  slu'ep  and  tlu"  wool  (In'reof,  provided  th* 
aggregate  market  value  of  such  Hlieeji  sliall  not  exceed  fifty  dollars;  and 
nece«4sarv   food  ffir  «iicli  row.  hogs  and  Mlie<'j)  for  n  period  not  «'\eeedinrr  thirtv 


Appendixes.  289 

days,  fuel  to  an  amount  not  greater  in  value  than  twenty  five  dollars;  pro- 
visions to  an  amount  not  great<T  than  fifty  dollars;  household  furniture 
kept  for  use  to  an  amount  not  greater  than  three  hundred  dollars;  and  the 
hooks,  tools  or  implements  of  a  trade  or  profession  to  an  amount  not  greater 
tlian  one  iiundred  dollars  shall  be  also  exempt;  and  tho  ofTicer  making  the  dis- 
traint shall  summon  throe  disinterested  householders  of  the  vicinity  who  shall 
appraise  and  set  apart  to  the  owner  the  amount  of  property  herein  declared  to 
be  exer-pt. 

Sec.  3188.  In  such  ease  of  neglect  or  refusal  the  collector  may  levy  or  by 
warrant  may  authorize  a  deputy  collector  to  levy  upon  all  property  and  rights 
to  property,  except  as  are  exempt  by  the  preceding  section,  belonging  to  such 
person  or  on  which  the  said  lien  exists  for  the  payment  of  the  sum  due  as 
aforesaid,  with  interest  and  penalty  for  non-payment,  and  also  of  such  further 
!-um  as  shall  be  sufficient  for  the  fees,  costs  and  expenses  of  such  levy. 

Sec.  3180.  All  persons  and  officers  of  companies  or  corporations  are  required 
on  demand  of  a  collector  or  deputy  collector  about  to  distrain,  or  having  dis- 
trained on  any  property,  or  rights  of  property,  to  exhibit  all  books  containing 
evidence  or  statements  relating  to  the  subject  of  distraint  on  the  property  or 
rights  of  property  liable  to  distraint  for  the  tax  due  as  aforesaid. 

Sec.  3190.  When  distraint  is  made  as  aforesaid  the  officer  charged  with  the 
collection  shall  make,  or  cause  to  be  made,  an  account  of  the  goods  or  effects 
distrained,  and  a  copy  of  which  signed  by  the  officer  making  such  distraint 
bhall  be  left  with  the  owner  or  possessor  of  such  goods  or  eflfects  at  his 
dwelling  or  usual  place  of  business  with  some  person  of  suitable  age  and  dis- 
cretion, if  any  such  can  be  found,  with  a  note  of  the  sum  demanded  and  the 
time  and  place  of  sale,  and  the  said  officer  shall  forthwith  cause  an  injunction 
to  be  published  in  some  newspaper  within  the  county  wherein  said  distraint 
is  made,  if  a  newspaper  is  published  in  said  county,  or  to  be  publicly  posteo 
at  the  post  office,  if  there  be  one  within  five  miles  nearest  to  the  residence  of 
the  person  whose  property  shall  be  distrained,  and  in  not  less  than  two  other 
public  places.  Said  notice  shall  specify  the  articles  distrained  and  the  time 
and  place  for  the  sale  thereof.  Such  time  shall  not  be  less  than  ten  nor  more 
than  twenty  days  from  the  date  of  such  notification  to  the  owner  or  possessor 
of  the  property,  and  the  publication  or  posting  of  such  notice  as  herein  pro- 
vided, and  the  place  proposed  for  the  sale  shall  not  be  more  than  five  miles 
distant  from  the  place  of  making  such  distraint.  Said  sale  may  be  adjourned 
from  time  to  time  by  said  officer  if  he  deems  it  advisable,  but  not  for  a  time 
to  exceed  in  all  thirty  days. 

Sec.  3191.  When  property  subject  to  tax,  or  upon  which  a  tax  has  not  been 
paid,  is  seized  upon  distraint  and  sold,  the  amount  of  such  tax  shall,  after 
deducting  the  expenses  of  such  sale,  be  first  appropriated  out  of  the  proceeds 
thereof,  to  the  payment  of  the  tax,  if  no  assessment  of  such  tax  has  been  made 
upon  such  property,  the  collector  shall  make  a  return  thereof  in  the  form  re 
quired  by  law,  and  the  Commissioner  of  Internal  Revenue  shall  assess  the  tax 
thereon. 

Sec.  3192.  When  any  property  advertised  for  sale  under  distraint  as  afore- 
said is  of  a  kind  subject  to  tax,  and  the  tax  has  not  been  paid,  and  the  amount 
bid  for  such  property  is  not  equal  to  the  amount  of  the  tax,  the  collector  may 
purchase  the  same  in  behalf  of  the  United  States  for  an  amount  not  exceeding 
Fed.  Corp.  Tax—  19 


290        Fedeeal  Corporation  Tax  Law. 

the  said  tax.  All  property  so  purcha-sed  may  be  sold  by  the  collector  under 
such  regulations  as  may  be  prescribed  by  the  Commissioner  of  Internal  Rev- 
enue. The  collector  shall  render  to  the  Commissioner  a  definite  amount  of  all 
charges  incurred  in  such  sales,  and  in  case  of  sale  shall  pay  into  the  treasury 
the  surplus,  if  any  there  be,  after  defraying  all  lawful  charges  and  fees. 

Sec.  3193.  In  any  case  of  distraint  for  the  payment  of  the  ta.xes  aforesaid 
the  goods,  chattels  or  effects  so  distrained  shall  be  restored  to  the  owner  or 
possessor  if  prior  to  the  sale,  payment  of  the  amount  due  is  made  to  the  proper 
officer  charged  with  the  collection,  together  with  the  fees  and  other  charges; 
but  in  case  of  non  payment  as  aforesaid,  the  said  officers  shall  proceed  to  sell 
the  said  goods,  chattels  or  effects  at  public  auction,  and  shall  retain  from  the 
proceeds  of  such  sale  the  amount  demandable  for  the  use  of  tlie  United  States, 
and  a  commission  of  five  per  centum  thereon  for  his  ow^n  use,  with  the  fees 
and  charges  for  distraint  and  sale,  rendering  the  overplus,  if  any  there  be,  to 
the  person  who  may  be  entitled  to  receive  the  same. 

Sec.  3194.  In  all  cases  of  sale  as  aforesaid,  the  certificate  of  such  sale  shall 
be  prima  facie  evidence  of  the  right  of  the  officer  to  make  such  sale  and  con- 
clusive evidence  of  the  regularity  of  his  proceedings  in  making  the  same,  and 
shall  transfer  to  the  purchaser  all  right,  title  and  interest  of  said  delinquent 
in  and  to  the  propertj'  sold,  and  whore  such  property  consists  of  stocks,  said 
certificate  shall  be  notice,  when  received,  to  any  corporation,  company  or  asso 
ciation  of  said  transfer,  and  shall  be  authority  to  such  corporation,  company 
or  association  to  record  the  same  on  their  books  and  records  in  the  same 
manner  as  if  transferred  or  assigned  by  the  party  holding  the  same,  in  lieu 
of  any  original  or  prior  certificates  which  shall  be  void,  whether  cancelled 
or  not.  And  said  certificates,  where  the  subject  of  sale  is  securities  or  other 
evidences  of  debt  shall  be  good  and  valid  receipts  to  the  person  holding  the 
same  as  against  any  person  holding  or  claiming  to  hold  j)ossession  of  such 
securities  or  other  evidences  of  debt. 

Sec.  3195.  When  any  property  liable  to  distraint  for  taxes  is  not  divisible 
BO  as  to  enable  the  collector  by  a  sale  of  part  thereof  to  raise  the  whole 
amount  of  the  tax  with  ail  costs,  charges  and  commissions,  the  wliolc  of  siic!> 
property  shall  be  sold,  and  the  surplus  of  tlie  proceeds  of  the  sale,  after  satis- 
fying the  tax,  costs  and  charges,  shall  be  paid  to  the  person  legally  entitled  to 
receive  the  same;  or  if  lie  cannot  be  found,  or  n'fuses  to  receive  tlie  same,  sliall 
Ik!  deposited  in  the  treasury  of  tlie  riiiteil  States  to  lie  there  held  for  liis  use 
until  be  makes  application  therefo-  to  tlie  Secretary  of  the  Treasiny,  who 
iijKjn  such  ;i|i|ilicnt  ion  and  satisfactory  proofs  in  support  thereof,  sliall  by 
warrant   on  the  treasury  cause  the  same  to  be  paid   to  the  applicant. 

Sec.   3I!t(i.   W'lK-n   goods,  cliattels   or  effects   sullieient   to   satisfy    the   tax    im 
poRcd  upon  any  person  are  not   found  by  th<'  eolleetor  or  deputy  collector,  he 
is  authorized  to  collect  the  same  by  seizure  and  sale  of  real  estate. 

Sec.  3107.  The  ollicer  making  the  seizure  mentioiK'd  in  the  preceding  section 
shall  give  notice  to  the  jierson  whose  <'state  it  is  projiosi'tl  to  sell  by  giving 
him  in  hand,  or  leaving  at  his  last  or  usual  pliici-  of  abode,  if  lie  has  any  such 
within  the  collection  district  where  such  estate  is  situated,  a  notice  in  writin;j, 
statinir  what  particular  estate  is  to  bo  sold,  describinir  th«'  same  with  reason 
able  certaintv,  and  the  time  when  and  y)lace  whore  such  ofliccr  proyiosos  to  sell 
th«>  Bnme;  which  time  h!>.i1I  u"I  !"•  less  tli.ni  Iweiity  unr  more  than  forty  <lnvs 
from  the  lime  of  <riving  said  notice.     The  said  ollicer  shall  also  cause  u  n)ti1- 


Appkndixes,  291 

cation  to  the  same  effect  to  be  published  in  some  newspaper  witliin  the  county 
where  such  seizure  is  made,  if  any  such  there  be,  and  shall  also  cause  a  like 
notice  to  be  posted  at  the  post  office  nearest  to  the  estate  seized,  and  in  two 
other  public  places  within  the  county;  and  the  place  of  said  sale  shall  not  bo 
more  tiian  five  miles  distant  from  the  estate  seized,  except  by  special  order 
of  the  Commissioner  of  Internal  Revenue.  At  the  time  and  place  appointed 
the  officer  making  such  seizure  shall  proceed  to  sell  the  said  estat<;  at  public 
auction,  offering  the  same  at  a  minimum  price,  including  the  expense  of  mak 
ing  such  levy,  and  all  charges  for  advertising  and  tiie  ollicer's  fee  of  ten  dol- 
lars. When  the  real  estate  so  seized  consists  of  several  distinct  tracts  or 
parcels,  the  officer  making  the  sale  thereof  shall  offer  each  tract  or  parcel  for 
sale  separately,  and  shall,  if  he  deem  it  advisable,  apportion  the  expenses, 
charges  and  fees  aforesaid  to  such  several  tracts  or  parcels,  or  to  any  of  them 
in  estimating  the  minimum  price  aforesaid.  If  no  person  offers  for  said 
estate  the  amount  of  said  minimum  price,  the  officer  shall  declare  the  same 
to  be  purchased  by  him  for  the  United  States;  otherwise  the  same  shall  be 
declared  to  be  sold  to  the  highest  bidder.  And  in  case  the  same  shall  be  de- 
clared to  be  purchased  for  the  United  States,  the  officer  shall  immediately 
transmit  a  certificate  of  the  purchase  to  the  Commissioner  of  Internal  Rev- 
enue, and  at  the  proper  time,  as  hereafter  provided,  shall  execute  a  deed  there- 
for after  its  preparation  and  the  instrument  of  approval  as  to  its  form  by 
the  United  States  District  Attorney  for  the  district  in  which  the  property  is 
situated,  and  shall  without  delay  cause  the  same  to  be  duly  recorded  in  the 
proper  register  of  deeds  and  immediately  thereafter  shall  transmit  such  deed 
to  the  commissioner  of  internal  revenue.  And  said  sale  may  be  adjourned 
from  time  to  time  by  said  officer  for  not  exceeding  thirty  days  in  all,  if  he 
shall  think  it  advisable  so  to  do.  If  the  amount  bid  shall  not  be  then  and 
there  paid  the  officer  shall  forthwith  proceed  to  again  sell  said  estate  in  the 
same  manner.  And  it  is  hereby  provided  that  all  certificates  of  purchase,  and 
deeds  of  property  purchased  by  the  United  States  under  the  internal  revenue 
laws  for  taxes,  or  under  executions  issued  from  the  United  States  courts  which 
now  are  or  hereafter  may  be  found  in  the  office  of  any  collector.  United  States 
Marshal,  or  United  States  District  Attorney  shall  be  immediately  transmitted 
by  such  officers  respectively  to  the  Commissioner  of  Internal  Revenue,  and  it 
is  hereby  further  provided  that  for  the  preparation  and  approval  by  the  United 
States  District  Attorney  of  each  deed  as  above  required,  a  fee  of  $5.00  shall 
be  allowed  to  tliat  officer  to  be  paid  by  the  United  States,  and  which  he  shall 
account  for  in  his  emolument  returns. 

Sec.  3198.  Under  sale  of  real  estate  as  provided  in  the  preceding  section  and 
the  payment  of  the  purchase  money,  the  officer  making  the  seizure  and  sale 
shall  give  to  the  purchaser  a  certificate  of  purchase,  which  shall  set  forth  the 
real  estate  purchased,  for  whose  taxes  the  same  was  sold,  the  name  of  the 
purchaser,  and  the  price  paid  therefor ;  and  if  the  said  real  estate  shall  not  be 
redeemed  in  the  manner  and  within  the  time  herein  provided,  the  said  collector 
or  deputy  collector  shall  execute  to  the  said  purchaser  upon  his  surrender  of 
said  certificate  a  deed  to  the  real  estate  purchased  by  him  as  aforesaid,  re 
citing  the  facts  set  forth  in  said  certificate  and  in  accordance  with  the  laws 
of  the  state  in  which  said  real  estate  is  situate,  upon  the  subject  of  sales  of 
real  estate  under  execution. 

Sec.  319fl.  The  deed  of  sale  given  in  pursup.ncc  of  the  preceding  section  shall 


292        Federal  Corporation  Tax  Law. 

be  prima  facie  evidence  of  the  facts  therein  stated ;  and  if  the  proceedings  of 
the  officer  as  set  fortli  have  been  substantially  in  accordance  with  the  provi- 
feions  of  law,  shall  be  o»)nsidered  and  operate  as  a  conveyance  of  all  the  right, 
title  and  interest  of  the  party  delinquent  in  and  to  the  real  estate  thus  sold 
at  the  time  the  lien  of  the  United  States  attached  thereto. 

Sec.  3200.  Any  collector  or  deputy  collector  may,  for  the  collection  of  tax 
imposed  upon  any  person  committed  to  him  for  collection,  seize  and  sell  the 
lands  of  such  person  situated  in  any  other  collection  district  within  the  state 
in  which  such  officer  resides  and  his  proceedings  in  relation  thereto  shall  have 
the  same  elTect  as  if  the  same  were  had  in  his  proper  collection  district. 

Sec.  3201.  Any  person  whose  estate  may  be  proceeded  against  as  aforesaid, 
shall  have  the  right  to  pay  the  amount  due  together  with  the  costs  and 
charges  thereon  to  the  collector  or  deputy  collector  at  any  time  prior  to  the 
sale  thereof,  and  all  further  proceedings  shall  cease  from  the  time  of  such, 
payment. 

Sec.  3202.  The  owners  of  any  real  estate  sold  as  aforesaid  or  their  heirs, 
executors  or  administrators  of  any  person  having  any  interest  therein  or  a 
lien  thereof,  or  any  person  in  their  behalf,  shall  be  permitted  to  redeem  the 
land  sold,  or  any  particular  tract  thereof  at  any  time  within  one  year  after 
the  sale  thereof,  upon  payment  to  the  purchaser,  but  in  case  he  cannot  be 
found  within  the  county  in  which  the  land  to  be  redeemed  is  situate,  then  to 
the  collector  of  the  district  in  which  the  land  is  situate,  for  the  use  of  the 
purchaser,  hia  heirs  or  assigns,  the  amount  paid  by  the  said  purchaser  and 
interest  thereon  at  the  rate  of  twenty  per  centum  per  annum. 

Sec.  3203.  It  shall  be  the  duty  of  every  collector  to  keep  a  record  of  all  sales 
of  land  made  in  his  collection  district,  whether  by  himself  or  his  deputies,  or 
by  any  collector,  in  which  shall  be  set  forth  the  tax  for  which  any  such  sale 
was  made,  the  dates  of  seizure  and  sale,  the  name  of  the  party  assessed,  and 
all  proceedings  in  making  said  sale,  the  amount  of  fees  and  expenses,  the 
name  of  the  purchaser  and  the  date  of  the  deed,  and  said  record  sliall  l)e  cer 
tified  by  the  officer  making  the  sale,  and  on  or  before  the  15th  day  of  each 
succeeding  month  he  shall  transmit  a  copy  of  said  record  of  the  preceding 
moiitli  tc.  the  Commissioner  nf  Internal  Revenue.  And  it  shall  be  the  duty 
f)f  every  deputy  making  the  salo  as  aforesaid,  to  return  a  statement  of  all  hia 
jiroreedinga  to  the  collector,  and  to  certify  the  record  thereof.  In  case  of  the 
death  or  removal  of  the  collector,  or  expiration  of  his  term  of  office,  or  from 
any  other  eause  said  record  shall  be  delivered  to  his  successor  in  office;  and 
a  copy  of  every  such  record,  certified  by  the  collector,  shall  be  evidence  in  any 
court  of  the  truth  of  the  facts  therein  stated. 

Sec.  3204.  VVlien  any  lands  sold  as  aforesaid  are  redeemed,  as  heretofore 
provided,  the  collector  shall  make  entry  of  the  fact  upon  the  record  mentioned 
in  the  preceding  section,  and  the  said  entry  shall  be  evidence  of  said  redemp- 
tion. 

See.  320.').  Whenever  any  property,  personal  or  real,  which  is  seized  and  sold 
by  virtue  of  tli<-  foregoing  provisions,  is  not  stifficient  to  satisfy  the  claim  of 
the  rniteii  States  for  which  dintraint  f)r  seizure  is  made,  the  collector  may 
there.nftir.  and  as  often  a-^  the  same  may  b4'  necessary,  proceed  to  seize  and 
sell  in  like  irianner.  ativ  olhcr  property  liable  to  seizure  of  the  person  against 
whom  '(ueh  riaim  exists,  until  the  amount  due  from  him  together  with  all 
expenseH   i«   fully   paid. 


Appkndixes.  293 

Sec.  3206.  The  Commissioner  of  Internal  Revenue  shall,  by  regulation,  de- 
termine the  fees  and  charges  to  be  allowed  in  all  cases  of  distraint  and  other 
seizures,  and  shall  have  power  to  determine  whether  any  expenses  incurred 
in  making  any  distraint  or  seizure  was  necessary. 

Sec.  3207.  In  any  case  where  there  has  been  a  refusal  or  neglect  to  pay  any 
tax  and  it  has  become  necessary  to  seize  and  sell  real  estate  to  satisfy  tlie 
same,  the  Commissioner  of  Internal  Revenue  may  direct  a  bill  in  chancery  to 
he  filed  in  a  district  or  circuit  court  of  the  United  States,  to  enforce  the  lien 
of  the  United  States  for  tax  upon  any  real  estate,  or  to  subject  any  real  estate 
owned  by  delinquent,  or  in  which  he  has  any  right,  title  or  interest  to  the 
payment  of  such  tax  Any  person  having  liens  upon  or  claiming  any  interest 
in  th«  real  estate,  sought  to  be  subject,  as  aforesaid,  shall  be  made  parties  to 
such  proceedings  and  be  brouglit  into  court  as  provided  in  other  suits  in  chan- 
ciry  therein.  And  the  said  court  shall  at  the  term  next  after  the  parties  have 
been  duly  notified  of  the  proceedings,  unless  otherwise  authorized  by  the  court, 
proceed  to  adjudicate  all  matters  involved  therein  and  finally  determine  the 
merits  of  all  claims  and  liens  upon  the  real  estate  in  question,  and  in  all 
cases  wrere  a  claim  or  interest  of  the  United  States  is  established  shall 
decree  a  sale  of  said  real  estate  by  the  proper  officer  of  the  court,  and  the  dis- 
tribution of  the  proceeds  of  such  sale,  according  to  the  findings  of  the  court 
in  respect  to  the  interests  of  the  parties  and  of  the  United  States. 

Sec.  3208.  The  Commissioner  of  Internal  Revenue  shall  have  charge  of  all 
real  estate  which  is  now  or  shall  become  the  property  of  the  United  States 
by  judgment  or  forfeiture,  under  the  Internal  Revenue  Laws,  or  which  hai 
been  or  shall  be  assigned,  set  off  or  conveyed  by  purchase  or  otherwise  to  the 
United  States  in  payment  of  debts  or  penalties  arising  under  the  laws  relating 
to  internal  revenue,  or  which  has  been  or  shall  be  vested  in  the  United  States 
by  mortgage  or  other  security  for  the  payment  of  such  debts,  and  all  trusts 
created  for  the  use  of  the  United  States  in  payment  of  such  debts  due  them; 
and  with  the  approval  of  the  Secretary  of  the  Treasury  may  at  public  vendue, 
upon  not  less  than  twenty  days'  notice  sell  and  dispose  of  all  real  estate  owned 
or  held  by  the  United  States  aforesaid;  and  until  such  sale  the  Commissioner 
of  Internal  Revenue,  with  the  approval  of  the  Secretary  of  the  Treasury  may 
lease  such  real  estate  owned  as  aforesaid,  on  such  terms  and  for  such  period 
as  they  shall  deem  expedient.  And  in  cases  where  real  estate  has  or  may 
become  the  property  of  the  United  States  by  conveyance  or  otherwise,  in  pay- 
ment of  or  as  security  for  a  debt  arising  under  the  laws  relating  to  internal 
revenue,  and  such  debt  shall  have  been  paid,  together  with  the  interest  thereon 
at  the  rate  of  one  per  centum  per  month  to  the  United  States  within  two  year^ 
from  the  date  of  the  acquisition  of  such  real  estate,  it  shall  be  lawful  for  the 
Commissioner  of  Internal  Revenue,  with  the  approval  of  tlie  Secretary  of  the 
Treasury,  to  release  by  deed  or  otherwise  convey  such  real  estate  to  the  debtor 
from  whom  it  was  taken,  or  to  his  heirs  or  other  legal  representatives. 

Sec.  3209.  Whenever  a  collector  has  on  any  such  list  duly  returned  to  him 
the  name  of  any  person  not  within  his  collection  district  who  is  liable  to  such 
tax,  or  any  person  so  liable,  who  has  in  the  collection  district  in  which  he 
resides  no  sufficient  property  subject  to  seizure  or  distraint  from  which  the 
money  due  for  tax  can  be  collected,  such  collector  shall  transmit  a  statement 
containing  the  name  of  the  person  liable  to  such  tax.  with   the  amount  and 


29x         Federal  CoKPOKATlo^"  Tax  Law. 

to  which  such  person  shall  have  been  removed,  or  in  which  he  shall  have  prop- 
erty, real  or  personal,  liable  to  be  seized  and  sold  for  tax.  And  the  collector 
to  whom  said  certified  statement  is  transmitted  shall  proceed  to  collect  the 
said  tax  in  the  same  way  as  if  tlie  name  of  the  person  and  objects  of  tax 
contained  in  the  said  certified  statement  were  on  any  list  of  his  own  collection 
district;  and  he  shall,  upon  receiving  said  certified  statement  as  aforesaid, 
transmit  his  receipt  for  it  to  the  collector  sending  the  same  to  him. 

Sec.  3214.  No  suit  for  the  recovery  of  taxes  or  of  any  fine,  penalty  or  for 
feiture  shall  bo  commenced  undess  the  Commissioner  of  Internal  Revenue 
authorizes  or  sanctions  the  proceedings;  provided  that  in  case  of  any  suit  for 
penalties  or  forfeitures  brought  upon  information  received  from  any  person 
other  than  a  collector  or  deputy  collector,  the  United  States  shall  not  be 
subject  to  any  costs  of  suit. 

Sec.  3216.  All  judgments  and  moneys  recovered  or  received  for  taxes  unless 
costs,  forfeitures  and  penalties,  shall  be  paid  to  collectors  as  internal  taxes 
are  required  to  be  paid. 

Sec.  3220.  The  Commissioner  of  Internal  Revenue,  subject  to  regulations 
prescribed  by  the  Secretary  of  the  Treasury,  is  authorized  on  appeal  to  him 
made,  to  remit,  refund,  and  pay  back  all  taxes  erroneously  or  illegally  assessed 
or  collected  and  all  penalties  collected  witliout  authority,  and  ail  taxes  that 
appear  to  be  unjustly  assessed  or  excessive  in  amount,  or  in  any  manner 
wrongfully  collected;  also,  to  repay  to  any  collector  or  deputy  collector  the 
full  amount  of  such  sums  of  money  as  may  be  recovered  against  Iutu  in  any 
court  for  any  internal  taxes  collected  by  him,  witli  the  costs  and  exjK'uses  of 
suit;  also  all  damages  and  costs  recovered  against  any  assessor,  assistant 
assessor,  collector,  deputy  collector  or  inspector  in  any  suit  brought  against 
him  by  reason  of  anything  done  in  the  due  performance  of  his  official  duty: 
Proviih'd,  that  where  a  second  assessment  is  made  in  case  of  a  list,  statement 
or  return,  whicli  in  the  opinion  of  the  collector  or  deputy  collector  was  false 
or  fraudulent  or  contained  any  understatement  or  undervaluation  and  such 
assessment  shall  not  be  remitted,  nor  sliall  taxes  collected  under  such  assess- 
ment be  refunded  or  paid  back,  unless  it  is  proved  tliat  said  list,  statenu'iit  or 
return  was  not  false  or  fraudulent,  and  did  not  contain  any  understatement 
or  undervaluation. 

Sec.  .3224.  No  suit  for  tlie  purpose  of  restraining  the  assessment  or  collection 
of  any  tax  sliall  Ik'  maintaincil  in  any  court. 

Sec.  3225.  When  a  second  assessment  is  made  in  the  case  of  any  list,  state- 
ment or  return,  which  in  the  opinion  of  the  collector  or  deputy  collector  was 
false  or  fraudulent,  or  contained  any  understatement  or  undervaluation,  no 
taxes  coilecti'd  iiiuier  such  assessment  sliall  hi>  recovered  by  any  suit,  unless 
it  ifl  proved  that  the  snid  list,  statement  or  return  was  not  false  nor  fraudn 
lent  and  did  not  contain  any  understatement  or  undervaluation. 

Sit.  .322(5.  No  suit  shall  be  maintained  in  any  conrt  for  the  recovery  of  any 
internal  tax  ailegeii  to  have  been  erroneously  or  ilh-gally  assessed  or  collected, 
or  of  any  penalty  claimed  to  have  been  collected  without  nulliority,  or  of  any 
sum  alleged  {a  tiavc  Ix'cn  excessive,  or  in  .any  manner  wrongfully  collected, 
until  apfieal  shall  have  bf-en  dnly  mad*-  to  the  Commissidner  of  Intern.il  Rev 
enue  according  to  IIk-  [irovi^ions  nf  law  in  that  r^'gnnl.  and  tin-  rcgulatiims  of 
tlio  Secretary  of  tin-  '["rc'iuiirv  estnblislicd  in  |imsii:iTicr  fliorcnf.  and  a  decision 
of  the  ConimisHioner  has  been   h.id    tlK-rein;    provided  that  if  said   decision  in 


Appendixes.  29 


delayed  more  than  six  months  from  the  date  of  said  appeal,  tlun  llie  said  suit 
may  be  brought  without  first  having  a  decision  of  tlie  Commissioner  at  any 
time  within  the  period  limited  in  the  next  section. 

Sec.  3227.  No  suit  or  proceedings  for  the  recovery  of  any  internal  tax  alleged 
to  have  been  erroneously  or  illegally  assessed  or  collected,  or  of  any  penalty 
alleged  to  have  been  collected  without  authority,  or  of  any  sum  alleged  to  hav<- 
U'cn  excessive  or  in  any  manner  wrongfully  collected,  shall  be  maintained  iii 
any  court  unless  the  same  is  brought  within  two  years  next  after  the  causo 
if  action  accrued;  Provided  tliat  actions  for  euch  claims  which  accrued  prim 
to  June  six,  eighteen  hundred  and  seventy  two  may  be  brought  within  the  year 
from  said  date,  and  that  where  any  such  claim  was  pending  before  the  com 
missioner,  as  provided  in  the  preceding  section,  an  action  thereon  nuiy  be 
brought  within  one  year  after  such  decision  and  not  after.  But  no  right  of 
action  which  was  already  barred  by  any  statute  on  the  said  date  shall  be 
revived  by  this  section. 

Sec.  3228.  All  claims  for  the  refunding  of  any  internal  tax  alleged  to  have 
been  erroneously  or  illegally  assessed  or  collected,  or  of  any  penalty  alleged 
to  have  been  collected  without  authority,  or  of  any  sum  alleged  to  have  been 
excessive,  or  in  any  manner  wrongfully  collected,  must  be  presented  to  the 
Commissioner  of  Internal  Revenue  within  two  years  next  after  the  cause  of 
action  accrued;  provided  that  claims  which  accrue  prior  to  June  six,  eighteen 
hundred  and  seventy  two,  may  be  presented  to  the  Commissioner  at  any  time 
within  one  year  from  said  date.  But  nothing  in  this  section  shall  be  con- 
fttrued  to  revive  any  right  of  action  which  was  already  barred  by  any  statute 
on  that  date. 

Sec.  3229.  The  Commissioner  of  Internal  Revenue,  with  the  advice  and 
consent  of  the  Secretary  of  the  Treasury,  may  compromise  any  civil  or  crim- 
inal case  arising  under  the  Internal  Revenue  laws  instead  of  commencing  suit 
thereon;  and  with  the  advice  and  consent  of  the  said  Secretary  and  the  recom 
mendation  of  the  attorney-general,  he  may  compromise  any  such  case  after  a 
suit  thereon  has  been  commenced.  Whenever  a  compromise  is  made  in  any 
case  there  shall  be  placed  on  file  in  the  office  of  the  Commissioner,  the  opinion 
of  the  Solicitor  of  Internal  Revenue  or  of  the  officer  acting  as  such  with  bis 
reasons  therefor,  with  a  statement  of  the  amount  of  tax  assessed,  the  amount 
of  additional  tax  or  penalty  imposed  by  law  in  consequence  of  the  neglect  or 
delinquency  of  the  person  against  whom  the  tax  is  assessed  and  the  amount 
actually  paid  in  accordance  with  the  terms  of  the  compromise. 


296  .b'EDKRAl.    COKPOKATION    TaX    LaW. 


APPENDIX  RR. 

THE  TUCKER  ACT. 

(ACT  OF  MARCH  3RD,  1887  U.  S.  COMP.  STAT.  1901,  PAGES  752-758). 

An  Act  to  Provide  for  the  Bringing  of  Suits  against  the  Government  of  the 

United  States. 

Be  it  enacted,  etc.,  that  the  court  of  claims  shall  have  jurisdiction  to  hear 
and  determine  the  following  matters: 

First.  All  claims  founded  upon  the  Constitution  of  the  United  States  or  any 
law  of  Congress,  except  for  pensions,  or  upon  any  regulation  of  an  Executive 
Department,  or  ujx)n  any  contract,  express  or  implied,  with  the  Government 
of  the  United  States,  or  for  damages  liquidated  or  unliquidated,  in  cases  not 
sounding  in  tort,  in  respect  of  which  claims  the  party  would  be  entitled  to 
redress  against  the  United  States  either  in  a  court  of  law,  equity  or  admiralty 
if  the  United  States  were  suable;  Provided,  however,  that  nothing  in  this 
section  shall  be  construed  as  giving  to  either  of  the  courts  herein  mentioned 
jurisdiction  to  hear  and  determine  claims  growing  out  of  the  late  civil  war. 
commonly  known  as  "  war  claims,"  or  to  hear  and  determine  other  claims 
which  have  heretofore  1)€en  rejected  or  reported  on  adversely  by  any  Court. 
Department  or  Commission  authorized  to  hear  and  determine  the  same. 

Second.  All  set  ofTs,  counterclaims,  claims  for  damages,  whether  liquidated 
or  unliquidated,  or  other  damages  whatsoever  on  the  part  of  the  Government 
of  the  I'niled  States  against  any  claimant  against  the  Government  in  a  stato 
court,  provided  that  no  suit  against  the  Government  of  tlie  United  States  shall 
be  allowed  under  this  act  unless  the  same  shall  have  been  brought  within  six 
years  after  the  right  accrued  for  which  the  claim  is  made;  Provided  further, 
that  no  suit  against  the  Government  of  the  United  States,  brought  by  any 
ofTicor  of  the  United  States  to  recover  fees  for  services  alleged  to  have  been 
performed  for  the  United  States  shall  be  allowed  under  this  act,  unless  an 
account  for  said  fees  shall  have  been  rendered  and  finally  acted  upon  accord iii<» 
to  the  provisions  of  the  act  of  July  .31,  1804  (chapter  174,  28  Stat,  at  Uarge.  p. 
102),  and  unless  the  projjcr  county  oiTicer  fails  to  finally  act  thereon  within 
six  months  after  the  account  is  received  in  said  office. 

See.  2.  That  the  District  Court  of  the  United  States  shall  have  concurrent 
jnriH<lictif)n  with  the  court  of  claims  as  to  all  matters  named  in  the  preceding 
section,  where  the  amount  of  the  claim  does  not  exceed  one  thonsaiid  dollars, 
and  the  circuit  -ourts  of  the  United  States  shall  have  e(incun<'nt  jiirisdiction 
in  all  cunrn  where  tli<'  aindiint  of  said  claim  eMM'cds  otK"  tlmnsimd  dollars  but 
does  not  exceed  ten  thousnn<l  dollars.  All  causes  brought  an<l  tri<'d  under  flie 
provisions  of  the  net  shall  be  tried  by  a  court  without  a  jury.  The  jnrisdie 
(ion  berebv  conferred  upf)n  said  circ\nt  and  district  courts  shall  not.  exietid 
to  cases  brought  to  recover  f<'es,  sabuy  or  compens:i(  ion  fur  oflieiiil  services  i)f 
officers  of  llio  United  States  or  bmiiL'ht  for  siieli  iimpime  by  jiersons  cl.iiining 
at  niich  oiTicers,  or  as  assignees  or  legal   n'presenl.itivi's  thereof. 


Appkjsjdixes,  297 

Sec.  3.  That  whenever  any  person  shall  present  his  petition  to  the  court  of 
•laims  alleging  that  he  is  or  has  been  indebted  to  the  United  States  as  an 
officer  or  agent  thereof,  or  by  virtue  of  any  contract  tiierewith,  or  that  he  it 
the  guarantor  or  surety  or  personal  representative  of  any  oflicer  or  agent  or 
contractor  so  indebted,  or  that  he  or  the  person  for  whom  he  is  sucli  guar 
itiitor,  surety  or  personal  representative  has  iield  any  rtllice  or  agency  under 
tiie  United  States,  or  entered  into  any  contract  tlierewitli,  in  which  it  may  bo, 
or  has  been,  claimed  that  an  indebtedness  to  the  United  States  has  arisen 
and  exists,  and  that  he  or  the  person  he  represents  lias  applied  to  the  prop<'r 
department  of  the  Government,  and  that  tlie  account  of  such  fees,  agency  or 
indebtedness  may  be  adjusted  and  settled,  and  that  three  years  have  elapsed 
from  the  date  of  such  application,  and  that  said  account  still  remains  un- 
Bettled  and  unadjusted,  and  that  no  suit  upon  the  same  has  been  brought  by 
the  United  States,  said  court  shall,  due  notice  first  being  given  to  the  head 
of  such  department  and  to  the  Attorney  General  of  the  United  States,  proceed 
to  hear  the  parties  to  ascertain  the  amount,  if  any,  due  the  United  States  on 
such  account.  The  Attorney  General  shall  represent  the  United  States  at  the 
hearing  of  said  cause.  The  court  may  postpone  the  same  from  time  to  time 
whenever  justice  shall  require.  The  judgment  of  said  court,  or  of  the  Supreme 
Court  of  the  United  States  to  which  an  appeal  shall  lie,  as  in  other  cases,  aa 
to  the  amount  due,  shall  be  binding  and  conclusive  upon  the  parties.  The  pay- 
ment of  said  account  so  found  due  by  the  court,  shall  discharge  such  obliga- 
tion. An  action  shall  accrue  to  the  United  States  against  such  principal  or 
surety  or  representative  to  recover  the  amount  so  found  due,  which  may  be 
brought  at  any  time  within  three  years  after  the  final  judgment  of  said  court. 
Unless  suit  shall  be  brought  within  said  time  such  claim  and  the  claim  on  the 
original  indebtedness  shall  be  forever  barred. 

Sec.  4.  That  the  jurisdiction  of  the  respective  courts  of  the  United  States 
proceeding  in  this  matter,  including  the  right  of  inspection  and  appeal  shall 
be  governed  by  the  law  now  in  force  in  so  far  as  the  same  is  applicable,  and 
not  inconsistent  with  the  provisions  of  this  act ;  and  the  course  of  procedure 
shall  be  in  accordance  with  the  established  rules  of  said  respective  courts  and 
of  such  additions  and  modifications  thereof  as  said  courts  may  adopt. 

Sec.  5.  That  the  plaintiff  in  any  suit  brought  under  the  provisions  of  the 
second  section  of  this  act  shall  file  a  petition  duly  verified,  with  the  clerk  of 
the  respective  court  having  jurisdiction  of  the  cause,  in  the  district  where  the 
plaintiff  resides.  Said  petition  shall  set  forth  the  full  name  and  residence) 
of  the  plaintiff,  the  nature  of  his  claim  and  a  succinct  statement  of  the  fact^ 
upon  which  the  claim  is  based,  the  money  or  counterclaim  sought  to  be  recov- 
ered and  praying  the  court  for  a  judgment  or  decree  upon  the  facts  allowed. 

Sec.  6.  That  the  plaintiff  shall  cause  a  copy  of  his  petition,  filed  under  the 
preceding  section,  to  be  served  upon  the  District  Attorney  of  the  United  States 
in  the  district  wherein  suit  is  brought,  and  shall  mail  a  copy  of  the  same  by 
registered  letter  to  the  Attorney  General  of  the  United  States,  and  shall  there 
upon  cause  to  be  filed  with  the  clerk  of  the  court  wherein  suit  is  instituted, 
an  aflfidavit  of  such  service  and  the  mailing  of  such  letter.  It  shall  l>e  the 
duty  of  the  District  Attorney  upon  whom  service  of  petition  is  made  as  afore- 
said, to  appear  and  defend  the  interests  of  the  government  in  the  suit.  nn<i 
within  eixty  days  after  the  service  of  petition  upon  him.  unless  the  time  should 
be  extended  by  order  of  the  court  made  in  the  case,  to  file  an  appeal,  answer 


298        Federal  Corpobation  Tax  Law. 

or  demurrer  on  the  part  of  the  Government,  and  to  file  notice  of  any  counter- 
claim, set  off,  claim  for  damages,  or  other  judgment  or  defense  whatsoever  of 
the  Government  in  the  premises.  Provided,  that  should  the  District  Attorney 
neglect  or  refuse  to  file  the  appeal,  answer,  demurrer  or  defense  as  required, 
the  plaintiff  may  proceed  with  the  case  under  such  rules  as  the  court  may 
adopt  in  the  premises;  but  the  plaintiff  shall  not  have  judgment  or  decree 
tor  his  claim  or  any  part  thereof  unless  he  shall  establish  the  same  by  proof 
satisfactory  to  the  court. 

S«c.  7.  That  it  shall  be  the  duty  of  the  court  to  cause  a  written  opinion  to 
be  filed  in  the  cause,  setting  forth  the  specific  findings  by  the  court  of  the 
facts  thereunder,  and  the  conclusions  of  the  court  upon  all  questions  of  law 
involved  in  the  cause,  and  to  render  judgment  thereon.  If  the  suit  be  in 
equity  or  admiralty  the  court  shall  proceed  with  the  same  according  to  the 
rules  of  such  courts. 

Sec.  8.  That  in  the  trial  of  any  suit  brought  under  any  of  the  provisions  of 
this  act,  no  person  shall  be  excluded  as  a  witness  because  he  is  a  party  to  the 
interest  in  said  suit,  and  any  plaintiff  or  party  in  interest  may  be  examined 
as  a  witness  on  the  part  of  the  Government.  Section  1079  of  the  Revisod 
Statutes  is  hereby  repealed.  Provisions  of  section  1080  of  the  Revised  Statutes 
ehall  apply  to  cases  under  this  act. 

Sec.  9.  That  the  plaintiff  or  the  United  States  in  any  suit  brought  under 
the  provisions  of  this  act  shall  have  the  same  rights  of  appeal  or  writ  of  error 
as  are  now  reserved  under  the  statutes  of  the  United  States  in  that  behalf 
made  and  upon  the  conditions  and  limitations  therein  contained.  The  modes 
of  procedure  in  claiming  and  perfecting  an  appeal  or  writ  of  error  shall  con 
form  in  all  respects  and  as  near  as  may  be  to  the  statutes  and  rules  of  court 
governing  appeals  and  writs  of  error  in  like  cases. 

Sec.  10.  That  where  the  findings  of  fact  and  the  law  applicable  thereto  have 
been  filed  in  any  case  as  provided  in  section  fi  of  this  act,  and  the  judgment 
or  decree  is  adverse  to  the  Government,  it  shall  Ix'  the  duty  of  the  district 
attorney  to  transmit  to  the  attorney  general  of  tlie  United  States  certified 
copies  of  all  papers  filed  in  the  cause,  with  a  transcript  of  the  testimony 
taken,  the  written  findings  of  the  court  and  his  written  opinion  as  to  the 
name;  whereupon  the  attorney  general  shall  determine  and  direct  whetliT 
an  appeal  or  writ  of  error  shall  be  taken  or  not,  and  when  so  directed  tlie  dis 
trict  attorney  shall  cause  an  appeal  or  writ  of  error  to  be  perfected  in  ac- 
cordance with  the  terms  of  the  statutes  and  rules  of  practice  governing  the 
same;  prf)vi(U'd  that  no  apj)eal  or  v;rit  of  error  shall  be  allowed  for  six  months 
from  the  judgment  or  decree  in  such  suit.  From  the  date  of  sudi  final  judg 
ment  or  decree  interest  shall  be  computed  thereon  at  the  rate  of  four  per 
centmn  [x-r  annum  nniil  tlic  time  when  an  appropriation  is  made  for  thi> 
j);t\Tnf'iit  of  the  jiidgtiicnt   or  decree. 

Sec.  II.  That  the  attorney  general  shall  report  to  Congress  at  the  Wginning 
of  each  session  of  Congress  the  suits  under  this  act  in  whieli  a  final  judgment 
nr  decree  has  been  rendered,  (he  ilat<'  of  cacli  and  a  slatenictit  <>f  (lie  costs 
taxed    in   each    case. 

Sec.  12.  That  when  any  claim  or  matter  may  be  pending  in  any  of  the 
executive  departments  which  involves  controversies,  questions  of  fact,  or  loss, 
the  head  of  such  department,  willi  the  consent  of  the  claimant,  may  transmit 
the  same  with   the  vouchers.  pap4'rs.  j)roofs  and  documents  pertaining  thereto 


Appendixes.  299 

to  said  court  of  claims,  and  the  same  shall  be  there  proceeded  in  under  such 
rules  as  the  court  may  adopt.  W  hen  the  facts  and  conclusions  of  law  shall 
liave  been  found  the  court  shall  report  its  findings  to  the  department  by  which 
it  was  transmitted. 

Sec.  13.  That  in  every  case  which  shall  come  to  the  court  of  claims  or  is 
now  pending  therein,  under  the  provisions  of  an  act  entitled  "An  Act  to  afToid 
assistance  and  relief  to  Congress  and  the  executive  departments  in  tlie  in 
vestigation  of  claims  and  judgments  against  the  Government,"  approved  Marcli 
;i,  1883,  if  it  shall  appear  to  the  satisfaction  of  the  court  upon  the  evidence 
established  that  it  has  jurisdiction  to  render  judgment  or  decree  thereon 
under  existing  laws  or  under  the  provisions  of  this  act,  it  shall  proceed  to  do 
no,  giving  to  either  party  such  further  opportunity  for  liearing  as  in  its 
judgment  justice  shall  require,  and  report  its  proceedings  thereunder  to  either 
House  of  Congress  or  to  the  department  by  which  the  same  was  referred  to 
said  court. 

Sec.  14.  That  whenever  any  bill  except  for  pensions  shall  be  pending  in 
either  house  of  Congress,  providing  for  the  payment  of  a  claim  against  the 
United  States,  legal  or  equitable,  or  for  a  grant,  gift,  bounty,  or  any  present, 
the  House  in  which  such  bill  is  pending  may  refer  the  same  to  the  court  of 
claims  who  shall  proceed  with  the  same  in  accordance  with  the  provisions  of 
an  act  approved  March  3rd,  1883,  entitled  "An  Act  to  afford  assistance  and 
relief  to  Congress  and  the  executive  departments  in  the  investigation  of  claims 
and  judgments  against  the  Government,"  and  report  to  said  House  the  facts 
in  the  case  and  the  amount  where  the  same  can  be  liquidated,  including  any 
facts  bearing  upon  the  question  whether  there  has  been  delay  or  laches  in 
presenting  such  claim  or  applying  for  such  grant,  gift  or  bounty,  and  any 
facts  bearing  upon  the  question  whether  the  bar  of  any  statute  of  limitation 
should  be  removed,  or  which  shall  be  claimed  to  exclude  the  claimant  for  not 
having  resorted  to  any  original  legal  remedy. 

Sec.  15.  If  the  Government  of  the  United  States  shall  put  in  issue  the  right 
of  the  plaintiff  to  recover  the  court  may  in  its  discretion  allow  costs  to  the 
prevailing  party  from  the  time  of  joining  such  issue.  Such  costs,  however, 
shall  include  only  what  is  actually  incurred  for  witnesses,  and  for  summoning 
the  same  and  fees  paid  to  the  clerk  of  the  court. 

Sec.  16.  That  all  laws  and  parts  of  laws  not  inconsistent  with  this  act  are 
hereby  repealed. 


INDEX 


INDEX. 

[References  are  to  pages.] 

A 

Account 

instructions  relative  to  preparation  of 22.> 

Action  ag.'vinst  officer  making  levys 

remedy  by 173 

Action  of  debt 162 

Action  to  recover  taxes  paid  under  protest 174 

Additional  information 

Power  of  Commissioner  of  Internal  Revenue  to  require 139 

Affirmation 

returns  to  be  made  upon 92 

Agricultural  association 

definition  of 69 

Allowance 

for  deprt>ciation  of 126 

for  net  income  required  by  law  to  be  made  to  reserve  funds 127 

for  sums  paid  on  policies  and  annuity  contracts 127 

Appeal  to  Commissioner  of  Internal  Revenue 

remedy  by 171 

Appeals 

what  courts  have  power  to  hear 172 

Assessment  and  collection  of  special  excise  tax,  regulation  concerning.  186 

[303] 


o 


04  IXDEX. 

I  References  are  to  pages.] 


Assessment  insurance  companies 

deductions  permitted  in  case  of 136 

Assessment  of  federal  corporation  tax 

legal  effect  of  making  under  protest 149 

notice  of 143 

powers  of  commission  in  making 147 

statutory  definition  of  amount  of 14S 

time  within  which  to  make 148 

when  becomes  due  and  payable 149 

Assistant  treasurer  may  make  returns 137 

Association 

definition  of 64 

Attachment  of  real  estate 158 

Attorney  General,  opinions  by.    240,  243,  245,  247,  249,  255,  257,  262,  265 


B 


Bad  debts 

proper  deduction 126 

Banks  and  financial  institutions 

form  of  returns  by 95,  270 

returns  by 94 

Banking  institutions 

deduction  of  interest  by 130 

Bill  of  f(iiiiiil;iint 

foriri   for 280 

Bondtil    indobtodnoHH 

deductions  for  interest  paid  on 128 

Books 

f'x.'t  mi  nation  of  —  how  secured 141 

what  witnesHCfl  may  Iw  conipnlli'd   to  produce 142 


Index.  305 

[References  are  to  pages.] 


Building  and  loan  association 

definition  of 72 

Business  and  properties 

expense  of  maintenance  of 122 

expense  of  operation  of 123 

Business  transacted 

meaning  of 133 


C 

Capital  assets 

income  from  sale  of 113 

Capital  invested  in  personal  property 

income  from 112 

within  United   States  —  meaning  of 13  J 

Character  of  corporation 

how  determined 87 

Charitable  organizations 

definition  of 73 

Charter 

effect  of  designation  in,  of  principal  place  of  business 137 

Classification  of  the  elements  which  go  to  make  up  the  gross  income 

of  corporations  and  companies  subject  to  the  tax 108 

Collection  of  tax      153 

by  action  of  debt 1  (52 

by  attachment  and  sale  of  real  estate 153 

by  levy  upon  personal  property 15fi 

enumeration  of  statutory  methods  for 155 

powers  of  the  secretary  of  the  treasury  in 16."] 

Collector  of  Internal  Revenue 

powers  of,  in  collection  of  tax 1  fi5 

power   to   reject   incomplete   returns 138 

returns  to  he  transmittod  to 137 

Fed.  Corp.  Tax  — 20 


306  Index. 

[References  are  to  pages.] 


(Commissioner  of  Internal  Revenue 

how  to  secure  examination  of  corporation's  books  by 141 

power  of  in  taking  testimony 140 

power  to  examine  books  of  corporation 140 

power  to  make,  amend,  or  correct  returns 142 

power  to  make  assessments 14  < 

power  to  require  additional  information 139 

power  to  require  corrected  returns •  13!* 

power  to  secure  attendance  of  witnesses 141 

power  to  take  testimony 1*0 

remedy  by  appeal  to 1  •  * 

Companies 

affected  by  the  tax •  61 

joint  stock 6" 

Condition 

that  losses  must  not  have   been  compensated  by   insurance   or 

otherwise 1"* 

Constitutionality  of  the  federal  corporation  tax 22 

Construction  of  Act ** 


Corporation 

character  and  purpose  of  —  how  determined 67 

definition  of 


52 


principal  place  of  business  of 137 

Corrected  returns 

evidence  required  upon  which  to  base  an  order  for 139 

power  of  commissioner  of  internal  revenue  to  require 138 

Corporation  tax.     (See  Federal  Corporation  Tax.) 

Corporation  tax  law 

text  of 175 

County  corporations  not  liable  to  tax 210 

Court  procrdiire '' ' 


remarks  tlnroon 


171 


Index.  307 

[tteferences  are  to  pages.  J 


Courts 

jurisdiction  to  punish  witness  for  refusing  to  attend  before  com- 
missioner    142 


D 


Debts 

action  of 162 

bad 126 

Deductions 

by  insurance  companies 127 

for  dividends  on  shares  in  a  company  whose  net  income  ia  less 

than   $5,000   132 

for  expense  of  maintenance  of  business  and  properties 122 

for  expense  of  operation  of  business  and  properties 123 

for  indebtedness 127 

for  interest  actually  paid  on  bonded  indebtedness 128 

for  interest  actually  paid  on  indebtedness  other  than  bonded.  .  .  .  128 

for  losses 124 

for  taxes 131 

from  gross  income  by  foreign  companies 134 

for   interest   135 

in  case  of  banking  institutions  to  the  amount  of  interest  actually 

paid  by  them  within  the  year  on  deposits 130 

on  account  of  shares  in  foreign  corporations 132 

permitted  to  assessment  insurance  companies 136 

to  be  made  from  gross  income  —  statutory  li.st  of 120 

to  the  amount  of  dividends  received  upon  stock  of  all  companies 

subject  to  the  payment  of  the  corporation  excise  tax 131 

what  losses  are  proper  subjects  of,  by  foreign  corporations 135 

Definitions 

of  agricultural  organizations 69 

of  association 54 

of  building  and  loan  association 72 

of  charitable  organization 73 

of  corporation 52 

of  educational  corporations 74 

of  foreign  corporations 76 

of  fraternal  beneficial  association 71 

of  horticultural  corporations 70 

of  income 105 


308  Index. 

[References  are  to  pages.] 


Definition  —  continued. 

of  joint  ^tock  companies 52 

of  labor  organizations  .    6® 

of  lodge  system '  * 

of  necessary  expenses 123,  135 

of  ordinary  expenses 123,  135 

of  organization  for  profit «» 

of  religious  corporations 73 

Delinquent  corporations,  notice  to  be  sent  to,  regulations  concerning. .  219 

Depreciation  of  property 

meaning  of  reasonable  allowance  for 124 

Disclosure  of  returns 

statutory  protection  against "* 

Dissolved  corporations 

when  subject  to  payment  of  tax 75 

Dividend  on  stock  held  in  other  companies 

income  from 1  *" 

Dividends 

deductions  for 131,  132 

what  may  be  deducted  by  foreign  companies  from  gross  income. .  135 

Domestic  companies 

manner  of  ascertaining  net  income  of H' 

Domiciliary  oflice 

of  corporations 1" 


E 

Educational  corporation 

definition  of  

Elements 

claHHifirntion  of  elementn  which  pn  to  mnko  up  prnss  income  of 

corporations  and  companirs  nuhjoct  to  the  paynx-iit  of  the  tax.  .  103 


Index.  309 

[References  are  to  pages.] 


Enumeration 

of  deductions  from  gross  income  by  foreign  companies 134 

of  statutory  methods  for  collection  of  tax 155 

Erroneous  returns 

penalties  for 1*3 

Evidence  required  upon  which  to  base  an  order  for  corrected  returns. .  139 

Examination  of  company's  books 

how  secured 1*' 

regulations  concerning 217 

Excepted  classes 68 

Excise  tax,  regulations  concerning 196,  202, 203 

Expenses 

meaning  of  necessary  in  case  of  domestic  companies 123 

meaning  of  ordinary  in  case  of  domestic  companies 123 

meaning  of  necessary  in  case  of  foreign  companies 135 

meaning  of  ordinary  in  case  of  foreign  companies 135 

meaning  of  those  paid  out  of  income 124 

of  maintenance  of  business  and  properties 122 

of  operation  of  business  and  properties 123 


F 

Failure  to  make  return 

penalty  for 1*' 


False  returns 


138 


penalties  for ^^^ 

Federal  corporation  tax 

assessment  of l*** 

constitutionality  of "' 

docs  not  infringe  upon  power  of  states  to  authorize  formation  of 

corporations • 

does  not  require   officers    of   corporations    to    incriminate    them- 
selves    "^ 


310  Index. 

[References  are  to  pages.] 


Federal  corporation  tax  —  continued. 

does  not  subject  corporations   to  unreasonable  search 20 

exemptions  from  the  operation  of 68 

fundamental  basis  of 104 

is  an  excise  tax 2 

is  not  a  direct  tax  upon  shares  nor  income  thereof 5 

is  not  a  franchise  tax 3 

is  not  an  income  tax 2 

is  not  imposed  upon  state  or  municipal  bonds 14 

is  uniform 16,   18 

operates  upon  public  service  corporations 11 

text  of 176 

Five  per  cent,  penalties 

regulation  conceraing 222, 226 

Foreign  business 

income  from 117 

Foreign  eompaniea 

business  of  —  where  carried  on 137 

manner  of  ascertaining  net  income  of 118 

statutory  enumeration  of  deductions  from  gross  income  of 134 

statutory  method  of  calculating  tax  on  income  thereof 132 

what  dividends  may  be  deducted  from  gross  income  by 135 

what  interest  may  lawfull\  be  deducted  from  gross  income  by. .  .  .  135 

what  losses  are  proper  subjects  of  deduction  by 135 

what  taxes  may  lawfully  be  charged  against  gross  income 135 

Foreign  corporations 

<|{'finitioii   of 76 

how  shall  business  transacted  by  foreign  corporations  within  the 
United  States  be  distinguished  from  that  transacted  in  foreign 

rountries 133 

Foreign  countries 

businesH   in,   distinguished   from   that  transacted   within    United 

States 133 

Foreign  invoHtmonts 

inromc   from    117 

Foreign  stenmship  companies 

rogiil.if iniT*  rf)rn»'rninp 205 


Index.  311 

I  References  are  to  pages.] 


Form  of  bill  of  complaint 280 

of  protest 152 

of  return  by  banks  and  other   financial   institutions 270 

of  return  by  insurance   company   269 

of  return  by  manufacturing  corporation 273 

of  return  by  mercantile  corporation 276 

of  return  by  miscellaneous  corporation    278 

of  return  by  transportation  corporation 272 

Franchise  payments 

proper  charges  for 124 

Fraternal  beneficial  societies 

definition  of 71 

Fraudulent  returns 138 

penalties  for 143 

From  all  sources 

meaning  of 107 

Fundamental  basis  of  corporation  tax 104 


G 


Gross  income 

deductions  to  be  made  from 120,  134 

of  corporations  —  regulations  concerning 198 

statutory    enumeration    of  —  deductions    by    foreign    companies 

from 1 3-* 

what  dividends  may  be  deducted  from,  by  foreign  corporations..  135 
what  interest  may  lawfully   be  deducted   from,  by   foreign   com- 
panies   135 

what  taxes  may  properly  be  charged   against,  by  foreign  com- 
panies    136 


H 

Horticultural  corporation 

definition  of 70 


312  Index. 

[References  are  to  pages.] 


Income 

definition  of 105 

expenses  paid  out  of 124 

from  business  —  meaning  of 109 

from  capital  invested  in  personal  property 112 

from  dividends  on  stock  held  in  other  companies 115 

from  foreign  business  and  foreign  investments 117 

from  investments 117 

from  property  constitutionally  exempt  from  taxation 113 

from  real  estat« 112 

from  sale  of  capital  assets 113 

meaning  of  net 117 

Income  received 

by  a  company  in  a  representative  capacity 117 

meaning  of H' 

Incomplete  returns 

power  of  collector  of  internal  revenue  to  reject 138 

Indebtedness 

bonded 1^^ 

deduction  for 127 

other  than  bonded ^^^ 

secured  by  mortgage  on  real  estate  purchased  by  corporation  — 

regulations  concerning 204 

Injunction 

remedy  by 1 ' " 

Inspection  of  returns  of  corporations 

rcgvilations  concerning 22S 

Instructions  to  collector  of  internal  revenue 206,  211,  212,  221,225 

Insurance  companies 

allowano*'  for  sums  paid  on  policies  and  annuity  contracts 127 

aBHosnmont ' 

deductions  by ' " ' 

form  of  return  by ^•'>  2^'^ 

returns  by ^* 


Index.  313 


[References  are  to  pages.] 


Insurance 

losses  compensated  by   125 

Interest 

limitation  upon  allowance  for 128 

paid   by   banking  institutions  during  year   on   deposits  —  deduc- 

.    tions  for  130 

paid  on  bonded  indebtedness 123 

what  may  l)e  lawfully  deducted  from  gross  income 135 

Internal  revenue 

commissioner  of 138 

Interpretation  of  Act 43 

"    phrases 44,  46 

Inventories 86 

Investment 

income  from 117 


J 


Joint  stock  companies 

definition  of 62 


L 

Labor  organization 

definition  of "® 

Legal  effect  of  excluding  from  the  operation  of  the  act  certain  classes 

of  fraternal  beneficial  organizations  and  societies 71 

Levy  upon  —  personal  property    ^^" 

real  property 158 

Lien 

to  what  extent  is  the  tax  a 154 


814  Index. 

[References  are  to  pages.] 


Limitation 

of   time   for   correction    of    returns 148 

upon  allowance  for  interest 128 

Lodge  system 

definition  of ''■ 

actually  sustained  within  the  year  —  meaning  of 125 

deduction  for 124 

meaning  of 125 

not  compensated  by  insurance 125 

what  are  proper  subjects  for  deduction  in  case  of  foreign  com- 
panies    135 


M 

Maintenance  of  business  and  properties 122 

Mandamus 

remedy  by 1*2 

Manner  of  ascertaining  net  income  of  domestic  companies 117 

foreign  companies 118 


ti  <c 


Manufacturing  corporations 

form  of  return  by 98,  274 

returns  by 98 

Meaning  of 

business  transacted  within  United  States 133 

capital   invested  within  United  States 131 

expenses  actually  paid  out  of  income 124 

losses 1"'^ 

loHHPs  actually  sustained  within   the  year 125 

necessary  expenses  in  case  of  domestic  companies 123 

necessary  expense  in  case  of  foreign  companies 135 

of    rH't    inonnic    ' ' ' 

ordinary  expense  in  case  of  domestic  cf)mpnnieH 123 

ordinary  expense  in  case  of  foreign  company 135 


Index.  315 

[Keferences  are  to  pages.] 


Meaning  of  —  continued. 

of  principal  place  of   business I37 

of  reasonable  allowance  for  depreciation  of  property 12(i 

of  taxes 131 

Meaning  of  income 

from  business 109 

from  capital  invested  in  personal  property 112 

from  foreign  business  and  foreign  investmcT'ts. II7 

from  investment 1 17 

from  property  constitutionally  exempt  from  federal  taxation.  .  . .  113 

from  real  estate 112 

from  sale  of  capital  assets 113 

received  by  a  company   in  a  representative  capacity 117 

received  in  paragraph  2  of  the  Act 105 

Meaning  of  phrase 

engaged  in  business  in  United  States .i . . ........  133 

from  all  sources  found  in  paragraph  2  of  Act 107 

having  a  capital  stock  represented  by  shares 65 

losses   actually   sustained   within   the  year 125 

no  part  of  the  net  income  of  which  inures  to  the  benefit  of  any 

private  stockholder  or  individual 74 

organization  for  profit 65 

organized  and  operated  exclusively  for  the  mutual  benefit  of  their 

members 72 

providing  for  the  payment  of  life,  sick,  accident,  and  other  bene- 
fits to  the  members  of  such  societies,  orders,  and  associations, 
and  dependents  of  such  members 72 

Mercantile  corporations 

form  of  return  by 100,  27fi 

returns  by 99 

Miscellaneous  corporations 

form   of   return  by 10?,  27S 

returns  by 101 


Municipal  corporation  not  liable  to  tax 220 

Mutual  building  and  loan  associations 

form  of  return  by 224 


316  Index. 

[BefereDces  are  to  pages.] 


N 

Necessary  expenses 

meaning  of  —  in  case  of  domestic  companies 123 

foreign  companies 135 

Net  income 

manner  of  ascertaining 117 

meaning  of 117 

Notice  of  assessment 143 


O 

Oath 

return  to  be  made  upon 137 

Officer 

remedy  against  for  making  levies 173 

Operation  of  business   and  properties 123 

Opinions  of  Attorney  General 245,  247,  249,  256,  257,  262,  265 

Ordinary  expenses 

meaning  of,  in  case  of  domestic  companies 123 

foreign  companies 135 

Organization  for  profit 

definition  of 0S 


P 


Penalties 

for  erroneoun,  falne,  and  fraudulent  returns 14S 

for  failure  to  make  return 137 

Personal  property 

levy  upon  and  sale  of 156 


Index.  31 


(References  are  to  pages.] 


Powers 

of  collector  of  internal  revenue  in  the  collection  of  the  tax 165 

of  commissioner  in  making  assessments 147 

of  secretary  of  the  treasury 163 

Premiums 

unearned 126 

President  to  make  return 137 

Principal  place  of  business  of  corporations 137 

Principal  oflScers  of  corporations  to  make  returns 137 


Property 

constitutionally  exempt  from  federal  taxation  —  income  from...  113 

reasonable  allowance  for  depreciation  of 126 


Protest 

action  to  recover  taxes  paid  under 174 

form  of 162 

legal  effect  of  making  payment  of  assessments  under 149 

Public  records 

are  returns **' 


Purpose  of  corporatioa 

how  determined •  •  •' 


R 


Heal  estate 

attachment  of ^^^ 

t                                                                                               ...  112 

income  from 

,      t  158 

sale  of \ 

sold  under  warrant  of  restraint  —  regulations  concerning 223 

Reasonable  allowance  for  depreciation  of  property 

t  126 

meaning  of 


318^.  IlSDBX. 

[References  are  to  pages.] 


Refusal  to  make  returns 

;  i- penalty  for  .   . .  . .  >  J.'.=;vv%-.';:. 138 

Regulations  of  the  secretary  of  the  treasury  with  reference  to  the  col- 
lection, remission,  and  refund  of  the  federal  corporation  tax 169 

Regnlations  of  Treasury  Department 184,  186,  196,  198,  199,  202, 

203,  204,  205,  206,  211,  212,  213,  217,  219,  220, 

221,  222,  223,  224,  226,  226,  227,  228,  231,  239,  240,  243 

Religious  corporations 

definition  of 73 

Remedy 

by  action  against  officer 173 

by  appeal  to  commissioner  of  internal  revenue 171 

by  injunction 172 

'  by  mandamus 172 

Rentals  '  • 

proper  charges  for 124 

Representative  capacity 

income  received  by  company  in 117 

Return 

are  they  public  records 143 

by  whom  made 137 

corrected  returns 139 

false 138 

fraudulent 138 

incomplete 138 

penalty  for  erron<'OUH,  false,  or  fraudulent 143 

penalty  for  failure  to  make 137 

Power  of  eommissioner  of  internal   revenue  to  make,  amend,  or 

correct '  42 

power  of  commissioner  of  internal  revenue  to  require  corrected..  138 

refusal  to  make 138 

ref^ulation  rnnc«'rnin{j 190 

rejection  of  incomplete 13S 

statutory  limitation  of  time  for  correction  of 143 

trnnHniisHion  «f   137 


Index.  319 

[BeferenceB  are  tu  pages.] 


Revenue  district 137 

Rules  for  determining  whether  a  foreign  corporation   is  engaged  in 

business  in  United  States 82 

Rules  of  the  secretary  of  the  treasury  with  reference  to  the  collection, 

remission,  and  refund  of  the  federal  corporation  tax 169 

Bales  of  statutory  construction 43 


S 


Sale  of  capital  assets 

income  from 113 

personal  property 156 

real  estate 1 58 

Scope  of  the  Act 51 

Secretary  of  the  treasury 

powers  of,  in  collection  of  tax 163 

rules  and  regulations  of,  in  connection  with  collection,  remission, 

and  refund  of  tax 169 

Special  excise  tax 

regulation  concerning 184 

State  corporations  not  liable  to  tax 220 

Statutory 

enumeration  of  deductions  from  gross  income  by  foreign  com- 
panies    134 

definition  of  amount  of  assessment 148 

limitation  of  time  for  correction  of  returns 143 

list  of  deductions  to  be  made  from  gross  income 120,  134 

method  for  collection  of  tax 155 

method  of  calculating  tax  on  income  of  foreign  companies 132 

protection  against  disclosures  of  contents  of   returns 146 

Statutes  relative  to  collection  of  internal  revenue  taxes 283 

Stegel  V.  Thurman,  decision  in 213 


320  Index. 

[References  are  to  pages.] 


Stock  held  in  other  companies 

income  from,  dividends  on 115 

Subject-matter  of  the  tax 51 

Supreme  Court  of  the  United  States 

opinions  of 239,  240,  24S 


T 

Taxes 

collection  of ^^' 

deductiona  for   I'l 

enumeration  of  statutory  methods  for  collecting 166 

foreign '^' 

is  it  a  lien 15^ 

meaning  of 1"' 

what  may  lawfully  be  charged  against  gross  income  by  foreign 

companies ^^^ 

Tax  returns 

by  whom  made ®' 

contents  of ^" 

from  banks  and  financial  institutions 9* 

from  insurance  companies 93 

from  manufacturing  corporations 9S 

from  mercantile  corporations 99 

from  miscellanooua  nirporations 10^ 

from  transportation  corporations 96 

general  provision  in  relation  thereto 84 

inventories  in  connection  with 8n 

verification  of "Z 

where  to  be  made 91 

Text  of  corporation  tax  enactment l"^'*' 

'1  line  witliin  wliich  assessment  must  be  made 148 

TranBmisHJon  of  the  return 137 

Trancportation  corporationn 

rr-fiirriM    by         '*" 

form  of  return  by 0*^-  272 


Index.  321 

I  References  are  to  pages.  J 


Treasurer  to  make  return 137 

Treasury  department  regulations 174,  186,  196,  198,  199,  202, 

203,  204,  205,  206,  211,  212,  213,  214,  219,  220, 

221,  222,  223,  224,  225,  226,  227,  228,  :231,  239,  240.243 

Tucker  Act 

text  of 296 


U 

Unearned  premiums 120 

United  States 

business  of  foreign  companies  transacted    within 133 

moaning  of  business  transacted  within 13-'5 

meaning  of  capital  invested  within 134 

I 
United  States  Revised  Statutes  relative  to  collection  of  internal  rev- 
enue    283 

United  States  Supreme  Court 

opinions  of 239,  240,  243 


V 

Verification  of  return 92 


W 

Witnesses 

how  compelled  to  testify  and  produce  books 142 

what  courts  have  jurisdiction  to  punish 142 

Fed.  Corp.  Tax  —  21 


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